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Going With The Flow Of Seasonal Stock Trends



Going With The Flow Of Seasonal Stock Trends

May has finally arrived, bringing relief from winter’s dreary days, and with spring, comes the time for many forms of renewal, including the spring cleaning of your stock portfolio.

Many stock brokers emphasize this idea very strongly with their clients: the 100most profitable investment strategy is to sell off all of your stock in the spring, and wait until fall to start making new investments. This is accepted as fact in many Wall Street circles.

But Is This Actually A Legitimate, Time-tested Strategy?

The truth of the matter is that any normative, universalizing claim such as this is almost guaranteed to have a few, if not many, exceptions. Luckily, there is a wealth of data on macro trends in seasonal stock fluctuations that can be carefully considered before making any sweeping claims about what may or may not be correct about the spring and fall markets.

A large reason investors tend to sell before summertime is the Volatility Index, or “fear index.” The VIX is a measure of the projected market volatility, or unpredictability, of S&P 500 index options in the next thirty days. It tends to be at its highest point in the summer months and decline in the fall.

However, the VIX isn’t always the best predictor of market success because just because stock values are unpredictable doesn’t necessarily mean that they will decrease.

Upon examination of the Dow Jones Industrial Average and S&P 500 stock values over the course of the entire year:

  • It appears to be true that earnings tend to decline drastically at the beginning of September into October.
  • However, over the course of the summer, the earnings gradually increase again.
  • Eventually, they arrive back near their original point by mid-December.
  • Surprisingly, earnings decrease in the spring months almost as extremely as in late autumn. In this case, it doesn’t make much sense to enter back into the market in the spring, as it tends to be in a small depression.

If this is true, then why is this advice to leave the market in the fall and re-enter in the spring so ingrained in wall street culture?

As humans, we tend to generalize and simplify trends to make them easier to think and talk about, but in reality, seasonal stock fluctuations are much more complex than this simple advice reflects.

There are many nuanced factors that contribute to seasonal changes in profit, and many of these trends may not hold true from year-to-year. Stocks tend to increase in profitability at the end of the year and fall around August for a variety of reasons.

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Year-End Reports and Reputation
Many companies increase the price of their stock near the end of the year in an attempt to make last-minute improvements in their year-end reporting numbers. If companies push stock and increase value near the end of the year, it can skew their monthly average and annual totals to promote the perception that the company is doing better than it actually is.

Another contributor to this trend is interest and bond payments that are issued at the end of the year, contributing to the capital available to investors. The year-end holiday atmosphere also plays a major role in this, as it has been proven that mood strongly influences buying and investment decisions.

Seasonal Trends Change Over Time
While it may have been true in the 60’s and 70’s that it was beneficial to remain outside of the market for the spring months, more recent data has shown a reversal of trends, and demonstrated that it is often more useful to remain out of the market for the early fall months.

Part of this discrepancy between information and perception may be caused by the trust young Wall Street investors have in their senior advisors, who likely were in their prime when it was, in fact, beneficial to get out of the market during the spring, and passed this information down to their advisees.

Information Incorporated In Studies

Many research studies that lead to widespread beliefs about seasonal stock trends don’t often incorporate enough diverse years or countries to be able to make a reasonably accurate claim, yet many of these studies are interpreted in certain ways and accepted anyways.

In recent years, mega-studies, such as Jacobson and Zheng’s 2012 Massey University study, have synthesized raw data from countries spanning the globe and hundreds of years. They concluded that April and December were the best months on average, and May and September are the worst.

Clearly, this is not strictly a divide between autumn and spring; many factors cause subtler fluctuations throughout the year. It holds true that in the summertime, stock values generally decline, and this is a good time to buy up stocks in anticipation of their increase in value in the fall.

Can we draw any conclusions from seasonal data?

Generally, the summer is a good time to buy stocks, so the old knowledge from Wall Street is not truly applicable in the modern era of globalized trade. However, seasonal trends do not hold true every year, and over time, seasonal trends change.

Because of this, it is usually better to be attentive and seek out information about short-term trends for the specific year. More specific, short-term seasonal trend data may be more difficult and time-consuming to understand, but the stock market is a complex and ever-changing world, and there is no simple, cure-all solution to investment decisions.

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