Seasonality recent history fared well, what seasonality is, a brief history, and what clients need to do moving forward.
As the market adage goes, “Sell in May and Go Away”. For the past week, we have been monitoring our technical indicators for signals that the favorable market season for equities was coming to a close. With yesterday’s waterfall drop in major equity asset classes, that drop triggered our seasonality technical indicators. This change in our seasonality indicator led us to reposition to more conservative positions in our investment portfolios for now.
Seasonality From November 2016 To Present
Looking back to last fall, our buy indicator for seasonality came after the conclusion of the Fall Presidential election. The election conclusion brought some certainty to the markets about our political landscape. Since entering our seasonality position (IVV – S&P 500 or alternative) on November 11th, that position gained over 9% through Tuesday’s close – not a bad gain for six months work.
Major market indexes including the Dow and the S&P 500 have been trading sideways since topping in early March although they have been scratching back to record highs in the last week. Conversely the tech dominated NASDAQ has continued to trade higher on the strength of technology leaders posting strong earnings such as Apple, Microsoft, Amazon, Facebook, and Google. Late news on Monday about the Trump / Comey controversy caused investors to sell during Tuesday’s session. Nothing changed economically, but the market is sensing the Trump agenda for tax and healthcare reform are in jeopardy with fractures in the Republican Party.
As a refresher, the seasonality pattern started after World War II and has continued into the present. With seasonality, most market gains in the equity markets occur from late October and into late spring. Just like the weather can vary from year to year, seasonality in the equity markets vary from year to year and there are years when it rewards an investor to stay fully invested through the unfavorable period. But over a multi-year period there is no denying the research that major market advances do not occur in the summer months.
In fact, research from Stock Trader’s Almanac reflect that from 1950 to early 2016, there was no reward for investors being invested in the equity market during the unfavorable months. Additionally, most bear markets end in the unfavorable months of May through October with October being the “bear killer” month.
A Short History Of “Sell In May”
Here’s a brief history of the strategy from Stock Trader's Almanac®…
Sell in May is an old British saw, soundly based on inherent behavioral finance patterns and the collective cultural behavior of the investment community, but it did not truly become a tradable investment strategy until after WWII…
Prior to about 1950, farming was a major portion of the U.S. economy and from 1901-1950, August was the best performing month of the year, up 36 times in 49 years (market closed in August 1914 due to World War I) with an average gain of 2.3%. July was the second best month, up 31 of 50 with an average gain of 1.5%. June was fourth best, averaging 0.9%. Why, you may ask? Simply: planting, sowing, reaping and harvesting. As crops were planted and then brought to market and sold, cash began to move and so did the stock market.
Agriculture’s share of GDP began to shrink post World War II as industrialization created a growing middle class that moved to the suburbs where hard-earned salaries would be spent filling new homes with all the modern conveniences we all take for granted now. Farming became more efficient and fewer and fewer people worked on the farm.
Suddenly, summer was less about the hard work of harvesting crops and more about vacations and relaxing. As the economy evolved and peoples’ lives changed, the market evolved. June and August went from being top performing months to bottom performing months. August went from #1 to #10 in 1950-2016 with an average DJIA loss of 0.2%. June went from #4 to #11 (–0.3% average loss). The shift in DJIA’s seasonal pattern is clear in the following chart. “Sell in May” is a post WWII pattern, prior to then it would have been “Buy in May”.
Image from The Stock Trader's Almanac®
As you can see from the chart, the black line representing 1901-1949 shows that equity market continued to rise throughout the summer. Conversely on the blue line, from 1950-2016, there is no market gains from late April to late October (aka the “Bear Killer” month).
What This Means For Our Clients
If you’re invested with Republic Wealth Advisors, you don’t need to do anything. Our team of portfolio managers has or is in the process of adjusting allocations to more conservative positions as appropriate. We will continue to monitor the markets and make adjustments as things play out in the next few weeks and months.
Our goal is for you to concentrate on what you do best in work, retirement, or your other projects, not worry about the ever-shifting financial markets.
Please feel free to reach-out if you have any questions about your individual situation.
IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’ current written disclosure statement discussing our advisory services and fees is available upon request.