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Summer Time Blues

Summer Time Blues                                                              

A Primer on financial market seasonality

There is an old Wall Street adage that recommends investors to “sell in May and walk away”.  This saying reflects the historical seasonality of market strength during the November to April time period and relative weakness from May to October.   Does this folksy maxim hold true credence?  Well, using the S & P 500 index as a proxy for the time period from April 30, 1945 thru April 21, 2006 does validate: the market advanced an average of 7.1% during the November-April period vs. an average gain of 1.5% from May through October.[1]   To further the point, the November through April period outperformed the May-October timeframe 68% of the time –not exactly coincidental data.

While all this may read like an Oliver Stone script; market forces, not manipulation, are likely at work.  So why does this seasonality happen over 2/3rds of the time?  There are a variety of theories beginning with extensive Hampton summer vacations by Wall Street traders and money managers.  Junior traders are basically left with “don’t screw anything up” instructions.  Eventually the financial gurus return tanned and rested.  They are fully aware that the S & P’s nastiest month is September and that the worst 3-month period is the third quarter.  Market analysts typically reduce their overly optimistic (see below) upcoming full year earnings estimates as third quarter earnings are released.  This usually leads to some kind of market bottom in October so the markets enter November at relatively lower levels and expectations.      

The November to April stretch has the advantage of two large cash infusion periods: 1) January, when money managers invest individuals’ year-end bonuses/holiday cash and 2) April, when IRA’s are fully funded.  Also, one cannot discount the pervasive holiday good mood.  Finally, January has the advantage of overly enthusiastic full year earnings estimates by analysts – yes, the same numbers that are knocked down come October.

So what does all this mean for the average investor?  Can one profit from these seasonal shifts: i.e. buying November 1st and selling April 30th?  Perhaps, but remember that taxes (non-retirement accounts) and transaction costs will likely eat up most incremental returns.  Also, it statistically doesn’t happen 32% of the time.  Instead of engaging in such short term timing programs, it is likely more suitable for average investors to consider the following suggestions:

·          Temper your expectations.  The broad market indices are up 4-6% year to date.  Don’t be shocked if they are still up only a marginal amount 6 months from now.

·          Sit on some cash.  Money markets are now paying 4%+ and 6 month treasury bills near 5%.  Don’t be afraid of accumulating cash and waiting for a more opportune time to invest it. 

·          Sell covered call options.  While this relatively conservative investment strategy is beyond the scope of this article, it can raise income in dull & dour markets.    

·          Address current asset allocation.  Does the complexion of your portfolio reflect your investment personality and goals?  If not, consider repositioning.

·          Gift appreciated securities.  While seemingly premature, it might be prudent to consider using appreciated (those with unrealized gains) stocks to fund your children or grandchildren’s inevitable late summer tuition bills.  Most schools will gladly accept – call the respective administration office for instruction.  

While we didn’t find a cure for the ‘summer time blues’, we may have found ways to temper it.  So if the annual summer malaise strikes, you don’t have to just accept it.  Being proactive with just a few simple strategies can pay off when Labor Day rolls around.  Of course, for those of you with a long-term investment horizon, seasonal market gyrations are usually nothing more than financial ‘noise’.  You may choose to do nothing and head straight to the lake…



Fiscal Fitness is a publication of Houlihan Asset Management, LLC for the benefit of its clients and friends.     Houlihan Asset Management.  Practical Advice. Prudent Investments.


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