Stack on Stocks: Patterns and Profits

11/27/2015 9:01 am EST


James Stack

President, Stack Financial Management

There are many adages on Wall Street that have been around for years and periodically capture media headlines. Yet in application, they're more pomp and circumstance than historical fact, explains Jim Stack, market historian, money manager, and editor of InvesTech Market Analyst.

That is not the case with stock market seasonality. This is one Wall Street truism that investors ignore at their own peril.

Historically, analysis shows that the majority of gains in the stock market have occurred between November 1 and April 30, while stocks have often succumbed to the summer doldrums from May 1 through October 31.

Looking back to 1960, the winter period from November through April has seen the S&P 500 (SPX) gain an average of 6.9%, while the May through October summer period has averaged only 0.9%.

When we discuss this phenomenon, one of our favorite graphs is "A Tale of 2 Seasonal Investors" because it illustrates the strength of this seasonal bias over time.

In this hypothetical example, each investor starts with $10,000 in 1960 and invests in an S&P 500 Index Fund for six months each year.

Investor A chooses the November-April period, while Investor B selects the opposite months from May-October.

Over the 55-year period, the difference in outcomes is dramatic. Investor A sees a 63-fold increase in value, while Investor B's portfolio did not quite triple.

Of course, investing based solely on seasonality is not a sound strategy as the seasonal shift doesn't always occur.

With that said, the traditional strength of the November-April period is so prevalent that it needs to be taken into consideration.

Looking more closely at the historical data, we can see why this trend should factor into our strategy.

  • Historically, the winter period has seen far more gains than losses. In fact, the winter period has seen gains 76% of the time, while summers ended on a positive note 63% of the time

  • Significant gains are also far more prevalent in winter than in summer. The November-April period experienced double-digit gains a hefty 36% of the time (20 years), as opposed to only 13% of the time (seven instances) for the summer months

  • Double-digit losses tend to be rare during the upcoming seasonal period. There have only been four instances in the past 55 years when the S&P 500 declined 10% or more from November-April...and those were all during major bear markets.

Moving to the present situation, one might wonder if the exceptionally strong rally off the summer correction could negatively impact seasonal strength this year.

The S&P 500 was up 8.3% last month...the fifth best October market performance since 1960. To shed some light on what might lie ahead, we again looked back for previous comparisons.

Historically, strong summer-end rallies have rarely detracted from emerging seasonal strength in November. October gains exceeding 5% have occurred nine times since 1960 and each time the subsequent November-April period turned in a strong performance.

Six out of the nine instances saw double-digit gains and each of those came after a rebound off a steep correction or a prior bear market low.

Bottom line, despite potential volatility surrounding the December Fed meeting, traditional seasonal strength should be on the side of the bulls over the next few months.

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