Just as the weather changes from one season to another, we too must prepare for cyclical changes in the market. In our stock market commentary, we often speak of the different seasons in the stock market.
There is a famous quote credited to Mark Twain, that says:
“History does not repeat itself, but it Rhymes.”
We see this phenomenon in the stock market when we look at the monthly returns of the stock market compiled together on a month-by-month and then analyzed together over the past 20 years.
When we look at the historical return data for the S&P 500 from 1996 to present, we see there have been two dominant periods for favorable returns: January through April and then October through December. This is where the concept of “Sell in May, and go Away” originated.
While we do no believe investors need to avoid the markets during the summer months, it does cause us to pay attention to historical trends. Because looking at past market behavior does show us seasonal patterns that often “rhymes” with history.
However, don’t just take my word for it, see for yourself. (click on the image to enlarge)
This chart highlights the cyclical patterns associated with the stock market over the past 20 years. You can see how the probabilities get higher as illustrated by the rising green arrows. Then July is circled in Red. July is circled because that is where we are now in the cycle, but it is also the least predictable month. While July has a historically positive rate of return of +0.3%, it only achieves this in 9 out of the past 20 years (45%).
So what does this tell us as investors?
For those investors who are underinvested, or still have additional capital to deploy, they should be looking for opportunities to put that money to work over the next 90 day.
For investors who are already fully allocated to the market, it simply says the summer months are less predictable. It is also a period of time where investment manager like us are analyzing holdings and setting their strategy for the upcoming months where the stock market is seasonally stronger.
It’s important to know that we continue to believe this market can and likely will go higher than most expect. We have been telling investors this since late 2009 and from what we are seeing in our analysis, we feel this market could continue to move higher for several more years.
With this said, you know how we respond to the market…
We invest based on the facts as shown by our research. This is why we always say, “If and when the facts change – so shall we.”