Sun’s Out, Cash Out?
We’re already nearing the Fourth of July, which happens to be my favorite holiday, and it usually marks the time of year when summer weather is here in earnest. Along with the heat usually comes a drop in market activity, as investors and traders go through a period of rolling vacations.
I’ve never been a big believer in seasonality as a predictive mechanism for returns, but I recognize that there are some clear patterns that emerge over long-term periods, and they’re worth at least keeping in the back of our minds as we navigate summer and fall.
The chart below shows average returns by season, rather than quarters or months, to give us a gauge of whether or not the weather (pun intended) tends to shift results. If you’ve done any studying of monthly patterns in markets, some of this may be no surprise. In any event, some stark differences do present themselves in the turn of seasons.
The most interesting piece is that summer has actually resulted in some of the best returns for riskier assets. Winter tends to be decently strong as well, mostly due to January typically being a strong month for markets.
According to this, holiday and vacation seasons aren’t to be feared after all, it’s the pesky in-between seasons, the transitional ones, that’ll getcha. Much like January being an outlier on the positive side, September tends to be an outlier on the negative side, and more than one crash has happened in October — easy to see why fall tends to be lackluster, at best.
Circling back to the title of this blog, perhaps not time to cash out yet — at least not by the rules of seasonality. The spread between summer and fall for large cap stocks is 2.7%. If only it were that simple…
Shallow End of the Volume Pool
The other clear force at play across seasons is changes in trading volumes. Those numbers alone don’t necessarily suggest good or bad returns, precarious or optimistic conditions, but the lower number of shares moving around on a daily basis can make markets more sensitive to volatility on the up and the downside.
The summer months of June, July, and August tend to be a light stretch, followed surprisingly by September as the lightest. If September tends to see low trading volumes, any downside catalyst is likely to be exacerbated by the reduced activity — i.e. the potential for volatility kicks in.
Either way, volumes see a clear dropoff after May that doesn’t typically pick back up until October. Here’s the thing, if markets are calm and volumes are down, that can make for a pretty chill summer period. But what would have the power to pull investors back in from the sun?
Volatility. Even more likely to pull investors back inside would be volatility that’s partnered with higher correlations (meaning asset classes start to move more in sync with one another, rather than the wide dispersion we’ve seen so far this year among large-cap growth…and basically everything else.)
If indexes started to fall, and fall together, people would be back in front of their screens in a jiffy.
Sunny With a Chance of Rain
As with any data sets we look to for answers, this one has its outliers. The challenging part of these analyses is that we never know if we’re in one of the “average” periods or one of the “outlier” periods. We’ll know when we can write articles about it in a couple years.
What I do know is that we’re in an outlier period of tightening policy and reduced liquidity. In some, or many, cases we’re at an outlier level of valuations. This all on the heels of a shock to the system in the form of a global pandemic that was most certainly an outlier.
Not to mention, we just came through a spring season that was an outlier on the positive side, according to these averages. I’d suggest that generally speaking, the odds are not in our favor to see a standout summer return pattern. At some point, stocks and bonds will have to settle the argument between who’s sending the right signal. Bonds still say ominous things, while stocks continue to swim through murky waters.
We may be witnessing an outlier period, or we may be in the midst of an unsurprising average period. The way I see it for the rest of summer, seasonality tailwinds are in a staring contest with threatening monetary conditions. Markets have certainly shown tenacity in the face of threats this year, time will tell if they can continue to fight through another season.
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