FORECASTS & TRENDS E-LETTER
by Spencer Wright
December 5, 2023

IN THIS ISSUE:

1.  What is Seasonality?

2. Examples From the Last Four SPX Market Cycles (20 Years)

3. The January Barometer / Sell in May and Go Away / A Santa Claus Rally

4. Conclusions

5. Remembering Gary

What is Seasonality?

From Investopedia, “Seasonality is a characteristic of a time series in which the data experiences regular and predictable changes that recur every year. Seasonality can affect different aspects of a business or economy based on the seasons, such as consumer spending, inventories, staffing and growth.”

That’s a bit dry, even for me. Another way to think of seasonality is that there are some months that are better for investment returns than others. Seasonality is present in individual stocks, sectors, sub-sectors and the broader markets. Each may have similar or wildly different seasonality characteristics. For this discussion I am focusing on the S&P 500 (SPX) over the last four market cycles. A market cycle is a five-year period. Seasonality data is available going back decades.

Examples From the Last Four SPX Market Cycles (20 Years)

This chart is packed with information. Let’s get to it.

[When looking at seasonal charts it is important to keep this in mind: Seasonal charts / calculations obscure volatility. They are only concerned with the destination, good or bad, and not the journey required to get there.]

Right off the bat, you can see that January has challenges. There is a seasonal concept known as the January Barometer that we will look at later. (Spoiler alert…it has had recent problems.) Most of the time January has been a net loser. It is, as you can see, the WORST month as far as the likelihood of a positive result is concerned.

September can be counted on, usually, to be one of the worst months of the year along with January and this graph backs that up. The interesting thing is September shows that it has had a gain 55% of the time, yet its average result is still a negative 0.5%. What could cause this? Volatility. January and September are two of the most volatile months of the year.

The best months are also obvious: April and July. An 80% / 75% probability respectively of generating a result over two percent. Look at the maximum result for April, a whopping 12.7%! (Coming off the COVID lows in 2020, I remember that well.) And July is no slouch, delivering a max result of 9.1% (A powerful bear market rally from last year!).

The January Barometer / Sell in May and Go Away / A Santa Claus Rally

Thanks to Gordon Scott for this on the January Barometer:

“The January Barometer is summed up in a single easy-to-remember phrase: ‘As January goes, so goes the rest of the year.’

This indicator was first printed in the publication "The Stock Trader's Almanac" and authored by Yale Hirsch, who first mentioned it in his 1972 edition of the book. The pie chart below shows the strong reason why such a phrase would be considered valuable information. Since 1928, the S&P 500 has had 91 occasions to test the January Barometer, and in 63 of those years, the market did close in the direction that January took over the remaining 11 months of the year. By comparison, all other months, on average, were significantly less likely to be as well correlated as January.”

An excellent point is made. The January Barometer has a very large sample size and has done reasonably well on a percentage basis over 91 years. Of course, this assumes that once you get a positive January you hold for the duration of the year, regardless of volatility. I think we all know that is easier said than done. And as the above seasonality chart reminds us, January has been problematic for the last twenty years.

Since January is unreliable, you could “Sell in May and Go Away.” Another well-known investing maxim that, like the January Barometer, has its origins in the Stock Traders Almanac. Sell in May and Go Away has worked at times but in the modern era it struggles mightily. Looking back at the seasonality chart you can see that this strategy misses July, one of the best months and the fourth quarter entirely, which has been generally solid.

Speaking of the fourth quarter, it seems that every year investors eagerly await a Santa Claus Rally. Once again, the Stock Traders Almanac is the origin of this event:

“Yale Hirsch, the founder of the Stock Trader’s Almanac, coined the ‘Santa Claus Rally’ in 1972. He defined the timeframe of the final five trading days of the year and the first two trading days of the following year as the dates of the rally.”

According to Investopedia:

“These seven days have historically shown higher stock prices 79.2% of the time, reflected in the S&P 500.The Stock Trader’s Almanac compiled data during the 70 years between 1950 and 2020 and showed that a Santa Claus rally occurred 57 times, with growth in the S&P 500 by 1.3%.”

And more recently, “During the 2022-2023 Santa Claus Rally, which included the final five trading days of December 2022 and the first two of January 2023, the S&P 500 rose 0.8%.”

I wonder what Santa will have in store for us this year considering that the markets just logged a super strong November.

Conclusions

Seasonality is a real thing. But it is far less influenced by agriculture and its related industries than it once was, which is one reason that the January Barometer and Sell in May and Go Away are not as reliable as they once were. Also, markets change. The last twenty years have seen the rise of algorithmic trading, which surely has played some part in the seasonality averages of late. It has certainly increased volatility. Also, it is important to remember that while seasonality has the backing of real historical data, a true predictor of markets does not exist.

Remembering Gary

This is not easy. I have wonderful memories of Gary. Wonderful.

Gary wore track suits. When I applied for a position with Halbert Wealth Management, he interviewed me three times, each while wearing a track suit.

He loved spicy food, especially jalapenos. He put jalapenos on everything. His favorite fast food was Whataburger. They have really big soft drink cups that he held onto for days after a visit.

Gary loved to entertain and cook for people, the more the better. His fajitas were the best.

Gary almost never called me Spencer. It was “Hey Chief” or “Captain,” but it was usually “Professor”. I am going to miss that more than anything.

Thanks for reading,

Spencer Wright

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.