Seasonal Patterns in Financial Markets – An Overview

It’s been almost two weeks since the first of November, traditionally the start of the best period for financial markets. Well, at least for equities it is. But what about other asset classes? Do they show a seasonal return pattern as well? And if so is it comparable to that of equity markets? This blogs aims to answer these questions

The idea is pretty straightforward. For each asset class involved (equities, real estate, commodities, high yield, credits and government bonds) I calculate the average return per calendar month. The starting point is 1991, which is only partly arbitrary, since it is also the ‘oldest’ starting point for which there are reliable return data in Bloomberg. Using these average calendar month returns I then look for the highest (and consequently lowest) return for a continuous period of six months. Hence, the seasonality effects are determined by looking at returns during uninterrupted periods of six months. That is different from adding the six individual months with the highest historical returns. First, individual months do not necessarily make up a ‘season’. Second, using six-month periods assures that the seasonality effect can be translated into a suitable investment strategy. Switching in and out an asset class every month can be costly and, at least for some asset classes, does not provide such a strategy. In addition to the results based on data since 1991, I will also show the seasonality pattern for a second period starting in 2002. Just to get a little idea of the sustainability of the seasonality.

Below are the results

  • Global Equities – calendar month returns

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  • Global Equities – Seasonality

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  • S&P 500 Index – calendar month returns

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  • S&P 500 Index  – Seasonality

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  • Nikkei Index – calendar month returns

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  • Nikkei Index – Seasonality

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  • Euro Stoxx 600 Index – calendar month returns

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  • Euro Stoxx 600 Index – Seasonality

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  • MSCI Emerging Markets Index – calendar month returns

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  • MSCI Emerging Markets Index – Seasonality

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  • Global Real Estate – calendar month returns

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  • Global Real Estate – Seasonality

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  • Commodities – calendar month returns

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  • Commodities – Seasonality

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  • Global High Yield Index- calendar month returns

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  • Global High Yield Index – Seasonality

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  • US Corporate Bond Index – calendar month returns

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  • US Corporate Bond Index – Seasonality

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  • US Treasury Bond Index – calendar month returns

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  • US Treasury Bond Index – Seasonality

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A few takeaways from the results presented above. First, the seasonal return pattern is very similar for each asset class. The strongest or the weakest six-month return period is either the traditional Halloween or Sell in May period from November to April or the six-month period starting one month later, in December. Corporate bonds are the only exception; the best uninterrupted period of six months starts in October. But, that again is only one month deviation from the traditional Sell in May seasonal pattern.

Second, while the seasonal pattern is very similar for both risky and safer assets, there is a sharp contrast in average returns. For risky assets, like equities, but also high yield and commodities, the ‘winter-related’ period (Nov-Apr, Dec-May, Oct -Mar) is unmistakably the best time to invest. Most of the overall return is made during these six months. In fact, in many cases the winter period yields a return that is above the overall average, since the return in the remaining, ‘summer-related’, part of the year is negative. For safer assets this is completely the opposite. The summer-related part of the year is now the best time to invest. Take government bonds where the return in the six summer-related months is almost 3% better than that of the winter period. So, this leads to the simple conclusion that investing in risky assets in winter months and switching them into safer assets during the summer is a profitable strategy.

That leaves two questions. Why do asset classes have similar seasonal return patterns? And why are the returns dependent on their riskiness? One possible explanation, which sounds very compelling to me, is that people, and thus investors, are too optimistic by nature. When the end of the year nears investors start to make predictions for the next year. Because of their overly optimistic nature they overestimate things like GDP growth, company earnings, and so on. On the back of these optimistic views, risky assets rise since they are likely to profit most. As the year progresses, reality kicks in, and investors adjust their predictions. Expectations are being lowered which makes risky assets vulnerable, hence pressuring their returns. But as the end of that year also nears, the ‘optimism cycle’ starts all over again.

 

3 responses to “Seasonal Patterns in Financial Markets – An Overview

  1. Pingback: Week End Blog – With Slow Growth, Oil Scares and Currency Wars | Jeroen Blokland Financial Markets Blog·

  2. Pingback: Sell in May – Early Summer Update | Jeroen Blokland Financial Markets Blog·

  3. Pingback: How April became the Pop Star of Equity Returns! | Jeroen Blokland Financial Markets Blog·

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