How Seasonality Can Affect Stock Markets

Bureau of Labor Statistics economists try to even out the gains in housing over the course of the year with their adjustments. Others argue that there’s no reason why some times of the year should be better than others. I have been a portfolio manager for nearly 30-years, and I believe in the seasonality of stock market trends. However, there is no “magic wand” to stock market forecasting, and veteran market forecasters use a variety of statistics in trying to “peak around the corner” in search of the next bull or bear market.

The example above shows Intel (INTC) with a strong bullish bias in April (84%) and October (79%). Also, notice that the average gain is 6.3% in April and 6% in October. On the bearish side, the stock moved higher only 32% of the time in September, which means it moved lower 68% of the time. The average loss in September is 4.5% and traders would have been rewarded for waiting until October 1st to consider buying. Notice that the remaining eight months did not have a strong bias because they range from 42% to 58%.

First, as mentioned above, these seasonal trends are merely long-term averages. In any given year, there could be a spike up in the May-through-October period that could cost you long-term performance if you’re out of the market. Perhaps more importantly, just because the summer months seem to be weaker on average doesn’t mean they don’t still post gains. Since 1945, the Fidelity data shows that the stock market gains around 2% on average in the May-through-October period.

If you sold in May, it’s time to start buying again, says the Stock Trader’s Almanac

Conversely, a bearish bias is present when a security rises less than 50% of the time. While 50% represents the exact middle, chartists should look for more extreme readings that suggest a relatively strong tendency. For example, readings above 65% would show an above average bullish bias, while readings below 35% would show an above average bearish bias. The weekend effect is the tendency of stock prices to perform worse on a Monday than they did on the previous Friday. This “seasonal” effect obviously doesn’t occur every week, and many times selloffs on Friday are followed by rip-roaring rallies on the subsequent Monday.

Seasonality refers to periods of time when market values are subject to and influenced by predictable and repeating yearly patterns. Seasonal effects are important to understand from an analytical perspective as they frequently explain market movements unrelated to current economic or business conditions. It is an essential software developer vs software engineer comprehensive comparison component for investors to consider when designing their investment strategies. In an article to come, I will expose interesting conclusions from Jacobsen’s publications about seasonal patterns in specific countries. The indexes are close to all-time highs, clearly due for a consolidation after a powerful rally.

  • Recurring events throughout the year can act as powerful catalysts for stock price increases or decreases.
  • On the bearish side, the stock moved higher only 32% of the time in September, which means it moved lower 68% of the time.
  • You don’t want to go against seasonal trends, because they are very powerful.
  • Many businesses rely on one season for the majority of their earnings.
  • Most season patterns are not statistically significant, meaning they are not based on enough data or haven’t accounted for other factors.

What good could come of adopting a seasonal stock trading strategy? Oil is a good example because it reliably shows city index review up on best-of lists for seasonal stocks. The rise in price has happened pretty constantly on a yearly basis.

I actually used to take summers off, since on the surface, it seems like trading is slower. But in recent years, I’ve adopted a different mindset since I noticed that there have been plenty of plays available. You can never know for sure how a stock will perform because the market constantly changes.

Post-Holiday Rally Pattern

Before leaving this example, notice that Intel was up 58% of the time in June, but the average gain was actually a loss. Even though Intel moved higher more often than it moved lower, the losses during the declines outpaced the gains during the advances. The stock-market seasonality trend has played out almost perfectly in the third quarter of 2023, with both August and September living up to their reputation as brutal months for U.S. stocks.

Seasonal Stock Market Trends

Equally crucial is a deep understanding of how to reduce potential losses. To navigate the complex financial world reliably and consistently over time, we need robust simple solutions. Much like the changing seasons in nature, the stock market follows its own rhythm, characterized by distinct patterns and trends that repeat throughout the year.

Seasonal Trend Points to an End-of-Year Stock Rally

Using a platform like StocksToTrade, begin to review the charts of stocks to review potential trends. It could be because of year-end adjustments to investments and portfolios, or it could be due to fxpcm holiday season optimism. According to this CNBC article, while June is “usually the most boring month for the stock market,” there can be exceptions based on world events and business happenings.

The Stock Market Just Ended Its Losing Streak. Why You Can Thank the Fed.

Chartists can confirm this by looking at the individual seasonal charts for $RUT and $SPX. As of January 2014, the average gain for the S&P 500 was 1.6% in December and the average gain for the Russell 2000 was 3.6%. Another approach to implementing proper risk management is to capitalize on historical drawdown patterns. From a psychological perspective, it makes sense that investors become increasingly irrational after a certain loss. This results in higher uncertainty, which in turn increases the likelihood of larger losses. In our analysis, we consider a loss of -15% from the peak of the last 12 months.

This article will explain how this tool works and show what chartists should look for when using our Seasonality Charts. Part of this decline can be attributed to a period of highly unseasonal inventory growth last year as the market slowed down late last summer and into the autumn season. However, the gap between this year and last year is shrinking as the inventory of homes for sale in September grew by 4.9% over August. This is higher than the typical seasonal trends in the pre-pandemic 2017 to 2019 period when inventory remained fairly flat between the two months. However, despite this small monthly increase, active inventory still remained 45.1% below typical 2017 to 2019 levels.

During this season, consumer staple stocks, such as Kroger, tend to perform very well. When it comes to seasonal stock, a lot of the upside is already cooked into the stock price. But, nevertheless, there has been data out there which shows that with some companies, their stock does tend to perform the best during their zenith earnings season. For the last three times when stocks were off 1% in the previous two months, October bounced back with an impressive gain of 10.8%, 8.3%, and 8.0%, respectively, said Detrick.

During market crash of 2008, this strategy lost less money than average market return. However, this might be due to start month of market crash (further analysis is required). One should note that this strategy is extremely simple without considering proper entry and exit point within each month. Therefore, in order to fully understand the profitability and risk of this strategy, in depth analysis is required which is outside the scope of this article. The economic cycle’s seasonality may explain why stock markets fall in September.

In this comprehensive exploration of stock market seasonality and trading strategies, we’ve uncovered a wealth of insights to empower investors and traders in their pursuit of success. At the heart of this journey is the recognition that the stock market is not a monolithic entity but follows a rhythm that mirrors the changing seasons. Understanding these seasonal patterns can be a game-changer for anyone seeking to navigate the dynamic world of finance effectively. Based on the historical performance of the past fifty years, we discovered that there are seasonal trends on the stock markets that occur during certain months of the year. In summary, seasonality in the stock market looks like it causes stocks to rise or fall at specific times of the year, month, or even week. The conclusion of a fiscal year, for example, is frequently marked by volatility and heavy selling as investors liquidate shares that have lost value to deduct capital losses from their tax bill.

Use these seasonality charts to calibrate your trading and system. Please consult with your financial advisor before making any investment decision. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.