Understanding stock market seasonality

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You're listening to Mobile Money by Moomoo Demystifying Markets One Episode at a Time.

Hi, welcome to Mobile Money by Moomoo. I'm your host, Justin Zacks, vice president of strategy at Moomoo Technologies. I've spent my whole career in and around financial markets. It's something I have a real passion for. This is a show that helps investors gain a better understanding of markets and their money. In the past, the stock market has tended to perform better during certain time periods and worse during other periods.

Today, I will talk to you about the different types of seasonal patterns. Why these patterns develop? What the data shows us and how it has affected traders. Please remember that past performance is no guarantee of future results. And then investing is risky and the landscape continues to evolve. To gain a better understanding of seasonality in markets, it's really important to understand supply and demand.

And I'm going to give you a little example. I recently took a little vacation in August to Portland, Maine, and I went aboard a lobster boat and to learn how lobster fishing works and do a little lobster fishing of my own. While I was there, I talked to the first mate in the captain who were commercial fishermen in the winter and trying to get an idea of how exactly the economics behind the lobster fishing works.

So in the summer, there's tons of lobsters. The lobsters migrate in towards the shore and you can do lobster fishing within three miles of the shore. So there's tons of supply at that time. Lobster eating is good that time of year, but a lot of people want to eat lobster all year round. So there's a demand all year round for lobster.

And I asked the commercial fishermen, I'd say, well, this must be your, you know, kind of your gravy time to do the fishing. And they said, well, it's actually the opposite because the lobster prices are so low, there's so much supply because it's very easy to fish for them. The commercial fishermen who are really prepared to do the hardcore fishing, they actually do their fishing in the winter.

And so the the lobsters migrate back out 20 to 40 miles off shore. And so these lobstermen have to go in their boat and stay overnight and put out, you know, tons of lobster pots. They're like maybe like a hundred or 200 of these lobster pots to fish for the lobsters because they can get double or triple the price that they would get in the summer.

So it makes it much more lucrative, even though the conditions are much more treacherous and probably quite miserable. You have rough seas and harsh weather that time of year, and even during the winter, there can be even a greater demand. In fact, one of the biggest demand times for lobster is during Chinese New Year. So a lot of the lobsters that are caught off Maine are eventually shipped into Asia and particularly mainland China in Hong Kong, where they're eaten during the Chinese New Year period, where lobster is a delicacy during that holiday.

And you can also think about some other holidays we have here in the U.S. Just think about how much a dozen roses might cost you during Valentine's Day and how much they might cost you at other times. I mean, maybe that might be triple or quadruple the price if you want to buy them, right, on February 14th. Or think about chicken wings on the Super Bowl.

A lot of these restaurants will, you know, stock up on chicken wings because that is the biggest day to order, order and eat chicken wings at the Super Bowl. So the prices there will go up. So you can take this back to stocks and really think about there's going to be different demand and supply of the actual stock depending on the time of the year.

Think about earnings. When earnings come out, there might be some type of a mismatch in the people that want to buy stock and the people that want to sell stock. So what actually causes the seasonality? Well, we've talked a little bit about the holidays that certainly can contribute to different seasonal patterns. The end of the year itself is something that is very important in terms of seasonality.

When you think about people starting their new year, there's obvious tax loss harvesting strategies that people use that can affect stock market pricing in both December and January. And then on the professional side, mutual funds, their fiscal year ends on October 31st. So a lot of times they're squaring up their portfolios right before and are adding or subtracting to their portfolios at the beginning of November.

So those are times where you can see different price movements that might be similar because of the seasonal patterns there. You know, you have the low volume during the holidays. You also have it when people go on vacation. So August, for instance, the last two weeks of August have traditionally been a period when people go on vacation. So you may see low volume seasonally during that period.

And then, you know, getting into the end of the year, you know, you hear this term Santa Claus rally. That's the idea that stocks kind of rally right around the Christmas time and into into New Year's. And there's been a lot of research into that. And it's an it is a thin volume period time. But there has it's been shown that there's really no discernible difference in performance during that time, at least recently over the past 30 or 40 years.

You also have the idea of sell in May and go away. The idea is to sell on May 1st and buy back around Halloween, October 31st. A lot of this really goes back to when the country was more agrarian and you had people that would stop trading, you know, around that time and they would go back to their farms or they would go on vacation for quite a long time and then not come back to trading until the fall.

And certainly nowadays that really doesn't happen. But we do still see the market historically exhibit some of these seasonal patterns. But there is definitely a misperception of this in even though during that time period stocks don't perform as well as they would in the alternate time period, they're still positive. So a buy and hold strategy has beat the sell in May and go away strategy over ten, 20 and 50 year timeframes.

It's something to think about. You know, if you do sell, it doesn't mean that you're going to necessarily make more money than if you would just use a buy and hold strategy. If we're talking about monthly seasonal trends, on average, historically they've been somewhat related to the quarterly earnings calendar. If you look at some of the best months historically over the past 90 years or so, they include July up 1.7%, April 1.4%, December and January are also very good months in July.

April in January are kind of the months where the majority of companies are reporting their earnings. And if you look back to the second quarter of 2023, over 8% of S&P 500 companies reported an upside earnings surprise. And so those tend to build on each other. And the reporting band usually starts about two weeks after the end of the quarter.

So for the first quarter earnings, you would see the reporting kind of start into April, on mid April. And again, April is one of those months. That's one of the better performing months of the year. And investors anticipate this and there's kind of a positive feedback loop. And then a lot of times the worst months come after the best months.

So there's this up and then there's a down. So, you know, February and May are also some of the worst down months are February down about 0.1% on average over the last nine years in May about the same. The whole idea of what goes up must come down at least somewhat. Obviously, the performance of the stock market historically has been on an upward trajectory.

You can really think about it in that a traders kind of get carried away with the momentum sometime. A great analogy is think about again going back to the Thanksgiving you anticipating that turkey and all the sides plus the dessert can forget about dessert, but sometimes you get carried away and you eat too much. You regret it the next day a little bit, and maybe it takes a little bit longer to eat all those leftovers than you thought.

So, you know, it takes time to digest some of those market gains. So you may see a sideways market or a down market after large gains in these types of seasonal times. What can we learn from the past? Well, let's take a journey back in our stock market time machine to find out what's happened during some of the worst months for stock performance.

Historically, September, as I mentioned before, has been the worst performing month on average historically, and its recent track record over the last four years has not been pretty. If you look to, you know, just this year, the S&P 500 was down 4.9%. A lot of that selloff came in the last half of the month after a Fed meeting where market participants really thought that the Fed is now going to hold rates higher for longer.

They had thought that they a rate cut might be imminent within the next 6 to 12 months. And now I think a lot of those views have been pushed out into the end of 2024 and possibly into 2025 as to when the Fed will actually cut rates. And obviously that can wear on the discounted cash flows of a lot of companies in their in their valuations.

But obviously this comes after an over 17% return in the S&P 500 year to date through August. So you did see a good run into September. And then September you saw again almost 5% down of 2022. We saw it's only a year ago and it seems like forever. We saw a 9.3% decrease in the S&P 500. And this year, positive returns might help you forget about that year.

But September 2020 was one of the worst. Septembers on on record is actually worse than 2008 In the Lehman debacle, the bankruptcy. A lot of this had to do with Russia and again, similar to the Fed, it's like the the Russian conflict had been going on in Ukraine, had been going on quite a long time at that point.

But a lot of market participants finally came to the realization that this conflict was not going to be quickly over in a few months, that it could go on for many years, the same as a lot of people are now realizing. The Fed, you know, in what they're doing, it's not going to be done in 3 to 6 months.

Actions by the Fed take a long time to work through the system and obviously in 2022, you saw a lot of talks about Russian oil ban and then you saw a spike in CPI, inflation during the middle of September of that year. And that really pushed things in the market a lot lower going back to 2021, we saw a 4.8% decrease in the S&P 500 in a year that the S&P 500 actually rose almost 27%.

And here again, it was the Fed Fed at that time talking about a taper, you know, the buying of bonds now rolling off the you know, the idea of quantitative tightening, worries about the economy, post-COVID, worries over inflation. Even back then, people were starting to worry about inflation, hadn't quite hit yet, but there was signs that it could pick up.

You had Chinese property developers in the news as they are now, worries over them, and at the time, Powell said inflation was tied to to the pandemic recovery and wouldn't lead to a new inflation regime. And, you know, two years on, the jury is a little bit out on that. At this point, though, it does still seem to be somewhat of a supply side problem.

And finally, in 2020, we saw a 3.9% decrease in the S&P 500. Again, another blip in a huge stock market bull run worries not about inflation, but at that time actually deflation. The Fed said it would hold rates near zero for at least three years at that time. We can see how that worked out. Three years on, it certainly hasn't happened.

They were looking to create inflation at that time, but there were already signs popping up in used car prices in it at the time. Stan Druckenmiller, kind of one of these famous hedge fund managers, predicted 5 to 10% inflation in the next four or five years due to a raging mania caused by COVID stimulus. And and in very much, his call has been kind of spot on so far.

We'll see what happens going forward, going a little bit further back and I mentioned this earlier was 2008 and that was also quite a bad September. S&P down 9.1%. That's when Lehman Brothers filed for bankruptcy. That was September 15th of that year. That day alone, the S&P lost 4.7%. AIG, the insurer, was taken over by the US Treasury.

Washington Mutual was seized by regulators. But actually almost all of the losses, even with all that happening, almost all the losses for the month came on one single day, the 29th of September, when the market was down 8.8%. That's in was one of the worst global sell offs in 21 years following the rejection of a $700, $700 billion bank rescue plan by US lawmakers.

Some and a lot of these investors do see these sell offs as opportunistic. So when these sell offs do happen, they are willing to take a chance sometimes and see what happens and in during 2008, one of the kind of famous dip buyers was Warren Buffett. He bought a $5 billion worth of Goldman Sachs investment bank preferred stock in it.

What you can really see is that a lot of these examples are kind of one off types of things. This doesn't necessarily feed into into September, and it could happen in any month. And so there is a question of why is September one of the worse? I mean, another example here is 2001. We had 911 and the stock market was down 8.2% that year in the market didn't reopen until September 17th and it had a 4.9% drop that day.

It's the third time in history such a we had such a prolonged closure. Not they include all World War One March of 1933 during the depths of the Great Recession. And what we saw there, not just the stock market going down very broadly, but there were certain sectors that obviously got hit very hard because of the attack itself.

We had airlines, insurance companies. They were particularly hard hit. And then if you want to talk about fewer September we've ever had in the S&P 500, and that is 1974, a 11.9% decrease. And here you had a lot of factors really that contributed to this. It wasn't just one. You had the end of Bretton Woods, which which fixed the dollar to gold.

You had a ton of inflation. You had, again, politics. Ford pardoned Nixon for the Watergate scandal and there were worries the pardon wouldn't bring closure to the situation. The inflation rate was above 11% in 1974. On average, there was an all OPEC oil embargo. Again, we're seeing history repeat itself. We've recently had OPEC plus cut back on their production significantly.

And we have some geo political concerns in the region as well. A lot of people are surprised when I tell them that September is the worst performing month on average. Historically, a lot of people think it's actually October. And October is actually not the worst month on average, but it is the most volatile, which means that it has the most ups and downs and people remember it because of a lot of the big crashes happened in October, whereas the September traditionally just has been a down month on average.

Again, many of these are specific events. They're not necessarily seasonal. They just happen these big crashes happen to have happened in October. And, you know, the one a lot of people that are, you know, obviously that are still alive to remember, you know, at this point, a lot of these other ones that occurred before many people were born was 1987, Black Monday, that was October 19th, saw a 20.5% decline in the S&P 500.

A lot of that had to do with the overvaluation of stocks, trade deficits and what you really saw there that a lot of people forget about is into the lead up. You saw a lot of volatility. You saw on the previous three days, too, that you saw decreases in the range of 2%, up to 5%. And then right after that, you saw a a really a very sharp recovery, 9% and then 5% the two days following.

The other thing that contributed to the massive decrease were margin calls or the idea that people borrowed money to buy the stock. And then once a stock decreases in value, you have to post what's called additional margin, additional funds. And if you don't have those funds, they will liquidate your stock. And so a lot of times what happens in these fast moving markets, people can't post that collateral quickly enough, the money that they are going to owe the exchange.

And so the stock is sold and exacerbates the selling and it creates kind of an avalanche of declining stock prices. One of the other most famous stock market crashes occurred in 1929 and actually occurred over several days. A lot of people don't realize it wasn't just one day. It kind of started on October 24th that was called Black Thursday.

The Dow Jones Industrial Average opened down 11% that day. Back then, they didn't have the S&P 500, but it ended up closing only down 2% after a lot of the bankers placed bids to stop the freefall of the stocks selling off. And then Monday we came in. It was Black Monday that the Dow Jones was down 12.8% and then Black Tuesday down 11.7%.

The total loss from October 11th to October 29th of that year was 35%. And with an over 20% drop for the month itself. A lot of it was driven by speculation and overvaluation, and we wouldn't see a bottom in the market until four years later in 1933. And back then, you know, we didn't have they didn't have the technology we have now.

And the huge volume led to ticker tape delays where they would print out the trades. So a lot of times they would have these trades coming in hours later because the ticker tape was so slow to print out all of the trades because there was so much volume. Now we have obviously much better technology and we also have circuit breakers.

So when the market goes down, certain amounts are they will halt halt trading for a certain length of time. And if it goes down too much, they will close trading for the entire day. Another really big sell off that a lot of people don't know about is occurred in 1907 and the NYSE declined 50%. That was due to a bank panic and it started with an attempt to corner the copper market using borrowed money.

Again, we hear talking about margin and a lot of these crashes, margin or borrowed money is a large contributor to those exacerbated moves. And this eventually led to a bank run in again, we saw a bank run happen not too long ago here. Obviously not not the same type of level that we saw in 1907. Our banks are involved in a lot of these sell offs.

Banks hold long term bonds on their balance sheet. The Fed has been raising rates, but recently back stopped a lot of this into the issues that we had in the spring of 2023. So the real question a lot of people have is, you know, how do I make money off of this seasonality? Are there seasonality strategies that people are employing that can make the money in?

The answer is it depends and it's quite difficult to do so. The real thing you have to think about is, you know, how much can we take stock in the stock market performance from 100 years ago, The idea of sell in May and go away, you know, the actual full quote is sell in May and go away. Do not return until st Ledgers Day, which was the last horse race of the season back then.

You know, this has had its roots in agrarian England. All right And back then, you know, stockbrokers went on vacation for the whole summer back to their, you know, to their family estates in the countryside from May until September. In that timeframe. And so when you think about that type of thing, and it doesn't really occur anymore, and even the worst months seasonally haven't been as bad as they have been historically before then frequently large declines have not occurred in September as often as they did before 1990.

The other thing to think about is Jackson Hole. You think about this symposium, economic symposium we had where the Fed chairman always speaks and it's become a big event in prior to it becoming a big event. You know that last week of August when when it's traditionally held, it's been very low volume, not nothing much going on in the stock market.

But now we have this big event and it has become much bigger. So you see these shifting patterns. So if you look at the last week of August, you might have say, well, back in 1950 it was very slow. But now since in the last ten or 20 years, it's it's become a much bigger deal because of the Jackson Hole economic symposium.

And it really dates back to 1997 when then Fed Chairman Alan Greenspan made remarks. While global markets fretted over a currency crisis in Asia, Greenspan made a brief mention of Mexico. In those remarks. He sent the Mexico stock market tumbling on fears that the Fed chair was signaling a spillover into the global financial system. And so those types of things can happen.

Stock market performance since the Jackson Hole speech in 2023, the most recent one by the Fed chairman, we saw a 2.3% gain in the S&P 500 from August 25th to the end of the month. So how should the average everyday investor be thinking about seasonality in their trading? You really need to be more aware of your risk. That's probably the most important thing.

So if you do, if you are coming into a seasonal period that is either more volatile or has exhibited negative performance in the past, you might want to think about your risk profile. That includes how liquid the markets may be during times of low volume and and adjusting your trade sizing when there is a negative sentiment or low volume.The other thing you can do is start your tax planning early so you start thinking about which trades you're going to make for tax purposes in November or even before then. But in the end round, you don't want to create a rigid plan based on historical trends. You really need to be adaptive follow current economic conditions and market news that's in the end run what's really going to matter and what's going to influence your trading?

In addition to market psychology, which is so important, and market psychology may exist somewhat in seasonal patterns, but it definitely does not exist in a vacuum. Overall. The other thing to think about when considering seasonality is that stocks don't always go up during the best months of the year and down during the worst months. There are many instances where the opposite occur and it's nowhere near close to 100%.

September has more down months than up months. So but you're really talking over the last 90 years plus, it's about 55% down months, 45% up months. Not something you want to bet the farm on December is the opposite. It has the most up months compared to down months. But even there are only 73% up months versus 27% down months.

So it's not something you can take to the bank and it's very important to think about what your risk is and think about the individual situation you're in in the markets are in. In conclusion, I'd just like to say historically there are seasonal trends in price and volume in the stock market, but many of these are not particularly strong relationships and should not be relied upon in the current trading environment.

Specific events that happen to occur in months such as September and October have influenced much of this historical performance. But again, we talked a lot of these are one offs. Earnings reporting has led to price swings in the market and it's important to be prepared going into the season with tools such as the earnings calendar and fundamental analysis.

I want to thank you very much for listening to the podcast and I hope to have you back soon. The opinions expressed are those of the host and any guest speaker and not necessarily those of Moomoo Technologies Inc or its affiliates. The podcast is provided for informational, educational purposes only and is not a recommendation or endorsement of any particular investment or investment strategy that may be mentioned or covered in the podcast.

All investments involve risk and the loss of principal as possible. Past performance does not indicate or guarantee future success. Moomoo is not affiliated with any outside guests or their companies. Information provided in this podcast is general in nature and may not be appropriate for all investors. The Moomoo app is an online trading platform offered by Moomoo Technologies Inc securities, brokerage products and related services available through the app or offered by Moomoo Financial Inc, a member of FINRA, SIPC.