Markets are often spoken of seasonally - as if akin to weather. Common themes include ‘The Santa Claus’ rally, ‘Sell in May and go away’, and even anniversaries of previous market crashes, such as the ‘Black Monday’ October 19, 1987 market plunge. In this article, we discuss market seasonality and the importance of screening out short-term market noise.
Are seasonal patterns real?
It has to be said that there is a long tradition of going through share market data in search of systematic patterns or anomalies that might lead to easy profits.
Some commonly cited seasonal patterns include:
- The Santa Clause rally – anticipates a surge of purchasing in the week between Christmas and New Year's day
- Monday effect – suggests that the first day of the trading week tends to be the worst day to be invested in shares
- Sell in May and go away – suggests investors should avoid a volatile May-October period
- Turn-of-the-month effect – anticipates higher returns on the last day and the first four days of each calendar month
Market seasonal patterns, to the extent that they exist at all, are by no means guaranteed, and in most cases are not investable. Regardless of this, the behavioural nature of investing can see markets becoming relatively ‘thin’, that is, lacking in buyers and sellers over some of these so-called seasonal periods. Thin markets, due to a lack of trades, can create large differences in the quoted buy and sell prices (spreads), which in turn tends to increase price volatility.
Liquidity can also be a real risk in thin markets. It is perhaps most palpable to self-funded retirees with little or no cash reserve, forcing them to sell units at distressed prices in order to fund their income needs. That’s why advisers often emphasise the need to maintain an adequate cash reserve.
What can investors do?
Author and humourist, Mark Twain once mused: “October is one of the most dangerous months to speculate in shares. The others are July, January, September, April, November, May, March, June, December, August and February.”
The point is, investors need to learn to screen out short-term market noise, and start to think more like a business owner – which is precisely what shareholders are. Often, there is so much discussion focused on markets and price, trying to explain every little rise and fall, that investors who don’t remain focused and committed to a strategy are in danger of losing sight of the forest by focusing on one or two trees.
For investors, price matters at only two times:
- When you buy
- When you sell
In the meantime, seasonal volatility can actually present investors compelling opportunities to buy quality assets at a discount to what they are worth. For example, investors will actually receive a greater number of units in their fund during a downturn. Counterintuitive as it may be, for those with a longer investment time horizon, bearish markets can actually assist in the creation of long-term wealth.
Phillip Hudak, Senior Portfolio Manager/Analyst at AMP Capital says: "We believe that ultimately, it is earnings that drive company share prices and periods of illiquidity and volatility can actually provide short-term opportunities for longer term gains."
When we read the paper, watch the news or check a business website, we seem to be inundated by a plethora of reports attempting to predict what the share market will do over the short- term. This festive season, whether the market ‘tis in the season to be jolly’ or not, it is important to remain focused on a sustainable investment strategy.
Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.