Seasonality is the phenomena where during certain times of the year markets behave almost predictably. It's rooted in the idea that investors and businesses and economic cycles have regular patterns.
These patterns aren't quite.
As regular as the phases of the moon. They don't always work, but combine with other factors, they can take on a life.
Of their own.
Season I'm Barry Redults and on today's edition of At the Money, we're going to discuss what you need to know about market seasonality to help us unpack all of this and what it means for your portfolio. Let's bring in Jeff hirsch Edler, in chief of the Stock Trader's Almanac, who's been studying seasonality just about his whole life.
Jeff, welcome, Hey, Barry, great to be with you.
So talk a little bit about this. I mentioned certain things happen every year. People raise money to pay taxes, They pay taxes certain times of year, they make regular contributions. What does the data you study say about seasonality?
It says that people are creatures of habit and it's a behavioral for nance at its core, where people are doing the same things over and over on a regular basis you mentioned in the intro the four to one K contributions.
One of the.
Things that I learned early on when I started working
for my father was about that mid month spike. So he had promoted a pattern for years, the best five days of the year, the monthly five day bulge, which was the last trading day of the month, in the first four of the new month, which is when people pay their bills and make all their transactions on a monthly basis, and then and I used to do those numbers by hand, using the Barons market lab pages and you know, underlining stuff and using an anti machine and
all that by hand work, which was educational. But there
we are looking at the pattern. We see there's a spike midmonth, and we're looking at each other, we're talking about it, and we realized that that was this new pattern of people with the payroll deductions going into the market, and fund managers have to be long so there is this spike where cash is coming into the market during the middle of the month, and you have that sort of super eight days of the month now where you have the middle three and the last two and first
three that become that seasonal pattern.
So my partner Josh Brown calls out the relentless bid. Your dad, Yalehurst, founded stock Trader's Almanac. Gee, is it sixty years ago?
How long ago? It was nineteen sixty six, the year of my birth.
Wow, that's I was amazing.
Born bredwen raised on all these patterns.
So one of the things that he has discussed and you've written about continuously is, Hey, it's not just the calendar. You have to look at things like technicals, fundamentals, sentiment, fun flows, monetary et cetera. How do you sort of take all these different factors and combine them with these.
Well, I mean, right now in twenty twenty three, seasonality, the four year cycle, the president's cycle are firing on all pistons. It's it's almost too easy. It's not always going to be that way. But we are always combining fundamentals, macroeconomics, moninary policy, and technicals with sentiment. And you're looking at it and it depends upon, like any fund manager or any trader, which factors are leading and driving the market
at any given time. And we're always looking for things that are you know, outliers and things that people aren't thinking about. Contrary thinking is part of it. But at our core, it's always about cycles. People are creatures of habit, you know, they do things on a regular basis every day. I mean, people get up the same time, they have lunch, the same time, they go to bed, the same time. The market closes the same time it opens at the same time.
And you see these patterns continually persist. So that's sort of our bias. But we look at you know, technical setups, and one of the key things is you know, if the market or the stock or the sector is tracking that pattern closely, then you know, gains we get gains.
Or losses we get losses.
And if it's if it's diverting, that's when we might not take advantage of a seasonal pattern because it hasn't come in setting up correctly or tracking the pattern closely.
So we're recording this a few weeks before Christmas. Let's talk about some of my favorite seasonal patterns that you write about in Stock Trader's Almanac. Santa Claus Rally, what's happening with that?
Everybody gets it wrong? Year in year out.
Yale, my father created this devised this indicator back in nineteen seventy two, came out in the seventy three Almanac. It is this tendency for the S and P five hundred gain one point three one and a half percent, not a huge number over the last five trading days of the year, in the first two of the new year. It's not the rally, the year end rally, the fourth quarter rally from Halloween to January that everyone likes to use.
That for the best few months of the year.
It's not the best few months of the year. It is this indicator. And as Yale, everyone forgets who created the You know he a songwriter, Barry, He could coin a phrase my father. The line is if Santa Claus should failed to call bears may come to broader wall. And what that means is that during that last week of the year, when you know you might be away, I might be doing some family things, and the pros are on this, you know, on their desk, buying up
bargain stocks that were sold for tax laws selling. If they're not doing that and the market doesn't valley during that time, it's an indication that things are amiss.
So let's talk about the January effect. What does that mean?
Well, the January fact not to be confused with the January barometer. The January effects is a tendency for small caps to perform large caps in January, and as we show in the Almanac, most of that January effect is really the December effect.
Now it takes they dump those stocks in December and now they're buying them back.
And right as we're speaking here, we're coming into that mid December period where small caps start to take off versus the large caps. We've seen the Russell two thousand already begin to perk up, as it does around the end of October. But the January barometer, which is the other season indicator, is as January goes, so goes the year. Another Yale invention at the same time in seventy two, and you know, we've seen January take take it on the chin a bit in recent years.
I saw a really interesting analysis of the January barometer that said it's not limited to January. It's essentially a momentum measure. Any strong month usually leads to another strong month.
There is the gains beginning gains.
We've compared all the monthly barometers, a very single month of January the best, not just like it, but you know, we've looked at it from the subsequent eleven months, the subsequent twelve months, and the whole year.
And the thing that happens in January is that it's the beginning of the year. Sets the tone.
It sets the tone you've got. And the reason why the January barometer works is that is the nineteen thirty three lame Duck Amendment to Congress. When they passed this, newly elected senators and congress people were would take office thirteen months later after they were elected, hence lame ducks, and then and presidents were also inaugurated in March. There was a whole period where you know, now it's January. Winter was tough back in you know, the colonial times
to get to DC. So it moved inauguration of January twenty If new Congress is convening to the first week of January, and everybody, including you know, President company here makes forecast, outlooks, sets, agendas, and precedents. You have States of the Union, State of the Union, addresses, and a lot of forecasts.
So it tends to be an optimistic timing year.
Tends to be optimistic. But also it's the time where people are looking to the future.
So you mentioned Congress and presidents. Let's talk about the presidential election cycle. I know you've been writing about this for as long as I know you. We're in the third year of a president's term. That is your favorite year.
It is the most bullish year. But I want to I want to just finish one thing on January if I can. There's a new, a new rinkle we've added to it since January has has had some trouble recently with a lot of profit taking. We've taken the old first five days of the year, which the early warning sess but it's also on the almanac, plus the Santa Claus rally plus the full month January barometer created something
called the January Indicator trifecta. Since nineteen fifty, when the three are up the Santa Claus rally, first five days in a full month, the S and P has been up ninety point three percent at the time, twenty eight to thirty one years for an average came to seventeen and a half percent.
That's pretty big, pretty good numbers.
How did the numbers look last year after we mand those lows in October of twenty two?
Did you have the track we get the Triffact in twenty three. Guess what twenty two? No sh effecta in a midterm year, which segues back to your question about the four year cycle, which you know you talked about things happening on a regular basis. There's only one country in the world that elects its leader on the same day every four years. That's the United States. Everyone's got these parliamentary votes.
Called for an election. Yeah, it's a week later and they're done so, which, by the way, in America, that doesn't sound too bad.
Get it over in a week.
Well, we can get into politics in theology. But the cycle here is, you know, the pre election year is the best year of the four year cycle, up about sixteen in.
The S and P. This is nineteen fifty.
We see the mid term lows that move from the mid term low like we had last year really well, yeah, I mean average gains about forty eight percent for the Dow from the mid term low to the pre election year high, and it's about sixty eight percent for Nasdaq. And what I've seen and what I show when I when I when I present to people is that amazingly, you know, there's a good cluster of lows in the midterm Octobers. We know that October is a bear killer
and another one of Yale's phrases. But a lot of the highs, the yearly highs, occur in December and in good chuckle them on the last trading day of the pre election year.
Now, how much of that is just window dressing and how much of that is just people have cash that they have to allocate in the calendar year and they're just putting it to work.
I think it's a lot of both of those. Yeah, I mean window dressing happens every year. Windows in September is what creates the negative period.
In September the fiscal year.
Then in September thirty.
And also the October thirty first botch of front deadline by the irs, where you got a file, you got to reconcile your accounting for the ten months of the twelve months.
And you know, so let's talk about what I know as your all time favorite seasonality factor. Sell in May and then go away.
I always say you got to buy in October to get your portfolio sover.
So again, this was something that you know.
David Aronson is a technical technician through the CMT organization as well as a brute college. He did a book in eight which was our best investment book of the year called Evidence based Technical Analysis.
Oh sure, I remember that.
So what he did was he took six thousand plus about sixty two hundred different black box systems and put them through the scientific method, which I had to learn what that is that testing the null hypothesis.
Taking it, taking it out of sample, running it against other is shoes, not just cherry picking the best assortment of dates.
Right, and seeing if any of these systems had predictive power or were just a result of chance. So when we picked that book, we said, David, can you take
the best six months and do the same thing. So he took it from Yale invented that strategy, the best six months Switching strategy, and it was in nineteen eighty six and the eighty seven Almanacs, so he took it from eighty seven forward so that he didn't have any of the back test bias in that and he found that unlike any of the other six thousand plus different black box systems, the best six months switching strategy had predictive power and the results were not.
The result of chance.
So It is one of the main overlays we have in our newsletter and portfolio construction that we do.
So rationalize this. What is it about May, June, July, August, September that seems to be so met.
Well, I mean I mentioned the October thirty, first weeks of fund deadline, which creates that sort of low period. You have the you know, most of the human race, most of human beings live in the northern hemisphere, right, most of the land masses up there. So we have, you know, this period of time where you know, there's a lot of light from May through September, and we do a lot of other things.
I've seen you go on fishing.
Trips, I play a lot of golf, My kids go to camp, people go on vacation, okay, And.
You know, you remember, everyone's distracted else everyone's distracted.
And you know when you have lower volume stock sandaco down especially you know, after you've come into the Q four and Q one with all that extra money and all that extra buying. So it's a it's a not a vicious cycle, but it's a regular cycle of the flow of cash and money in and out of the market, and people try to debunk the best six months by going back to eighteen ninety six when the dow started and you know, it didn't work back then, but back to people.
Really didn't go on summer vacation. There weren't a lot of sleepway camps back then.
No, And you know, it was a farming agrarian society where I was worked, where money pretty much buying me in the first half of the last century of the twentieth century, where money would come into the agriculture that'd be buying a fuel, seed, you know, fertilizer equipment, and they also were borrowing money. And then when the loans came due at harvest time is when the market rolled over in September.
So this is the inverse of that. So what's the worst month of the year for stocks.
August or September, depending upon if you go back to nineteen fifty or eighty seven post crash. So I mean, and they delivered this year back to back.
That was the low. August.
September was the low this year, and we had an amazing November following that. October was pretty good.
November was October was in turn.
October was the turn, which is I mean, there's a picture from the sixty nine Almanac, which shows that you know, October bear killer bargain month, the best time to buy stocks, especially small and tech stocks.
What are the best months for the year.
November, December, January or the three best consecutive months we've seen?
You know, October over.
Get better on the turnaround, but basically November December are the best. January has gotten a little bit weaker with profit taking. It seems to happen in the new year these days.
Last question, we're coming up on the fourth year of a presidential term. It's an election year in twenty twenty four. What does seasonality tell us about presidential election years?
Well, I mean, we have a sitting president running for re election and our research shows that you know, as we all know, the market hates uncertainty. So with the same person in office who's running again, whether whatever the polls.
Say is one thing.
But the fact that the potentiality of the same policies, the same economic, civic and you know, market oriented policies are going to be in play or at least the same mentality, the power of a sitting president is really undeniable. Years when you have a sitting president running for reelection. The Dow is up they excuse me, S and p is up twelve point six percent, twelve point eight percent, excuse me. And when there's an open field, it's minus one and a half percent.
Huh So for US.
You think it's bullish having a president run for reelection, even if it's against a prior president.
There's not a whole lot of data points for the Madrids. You gotta go back a century and chall what's it? One?
Amazing that's not a pattern. But anyway, we're bullish for twenty twenty four.
It's important to note that while these seasonal trends have been observed historically, they're certainly not guarantees of future performance. Markets are influenced by a wide array of factors, and past patterns do not always predict future results. Markets may have become more efficient than ever between algorithmic trading and AI, maybe that could have an impact on seasonal trends. Regardless, investors should be aware of seasonality and what it might
mean in combination with all those other factors. Were their comprehensive investment strategy. I'm Barry Ridolts. You're listening to Bloomberg radios at the money,