Dialogue from “Being There” (1979)
President “Bobby”: “Mr. Gardener, do you agree with Ben, or do you thinking we can stimulate growth through temporary incentives?”
(Long Pause)
Chauncey Gardener: “As long as the roots are not severed, all is well. And all will be well in the garden.”
President: “In the garden.”
Chauncey:”Yes, In the garden, growth has its seasons. First, comes spring and summer, but then we have fall and winter. And then we get spring and summer again.”
President: “Spring and summer.”
Chauncey: “Yes”
President: “Then fall and winter.”
Chauncey: “Yes”
Benjamin Rand: “I think what our insightful young friend is saying is we welcome the inevitable seasons of nature, but we’re upset by the seasons of our economy.”
Chauncey: “Yes! There will be growth in the Spring!”
Benjamin Rand: “Hmmmm.”
Chauncey: “Hmmmm.”
President: “Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I’ve heard in a very, very long time. I admire your good solid sense. Thats precisely what we lack on Capitol Hill.”
I must admit I’ve waited a long time to find an appropriate time to add that dialogue from Being There into our blog. Stock Market seasonality is a very real phenomenon and despite the market strength over the past six months we’re soon to be entering the strong season for stocks once again.
I recently came upon a paper by Jacobson and Zhang from Massey University in New Zealand: Are Monthly Seasonals Real? A Three Century Perspective. Jacobsen and Zhang examine an extremely long record of 300+ years of UK stock returns for evidence of monthly patterns.
Jacobsen defined Winter as the six months from November to April and Summer from May thru September. While the primary subject of the study was the UK markets they noted that the US stock market had a similar seasonal pattern as well, in fact most developed countries exhibited the pattern.
In a second study by Mateo Blumer in Seeking Alpha (May 17, 2012) titled “Market Seasonality: Capitalizing Upon Summer Decline”. In this study Blumer demonstrates that investing $10,000 in the Dow Jones Index (DJIA) on May 1 and selling it on October 31 each year since 1950, you would have actually lost money as of 2011. On the other hand you would have had a 7.1% per annum return by investing on November 1st and selling April 30th. Importantly, there were only three cases where the DJIA fell by greater than 10% during the Winter months (1969, 1973, 2008 and in all three cases the US economy was in recession).
A quick check with E-Forecasting clearly shows we’re not presently in a recession.
So how should investors understand how to use this data? First off we can never dismiss the possibility of a one-off event which cannot be anticipated for. But more importantly, if you’re an investor worried about the strength of our current bull and trying to anticipate a good pullback in order to buy in you might want to reconsider that thought. The best window of time for a pullback is passing as we ease into November. Rather than look for a grand pull back consider short term pullbacks that last in the order of a week or even less.
Be careful out there
Brad Pappas