Seasonal Tendencies

The market has now rocked for nearly a year causing some observers to recall the adage "Sell in May, then walk away". According to Sam Stoval, Chief Investment Strategist for Rydex Funds, "since 1945, the S&P 500 posted an average price gain of 7.1% during the November through April (N-A) period, versus a rise of only 1.6% from May through October (M-O), implying that greater profits could be made elsewhere. What's more, the performance during N-A outperformed M-O 69% of the time, as was the case in the last 12 months." He continues, saying "investors may be focusing more on their tans than their portfolios. Also, analysts may be more inclined to reduce their full-year earnings estimates late in third quarter than they would have been in the first or second, thus helping make September the worst performing month of the year. What’s more, October is historically a month in which the market establishes a bottom, so the S&P 500 enters November at a fairly low level compared to other months. This gives the N-A period the advantage of starting at a lower base."

This all makes sense. However, we've often thought the more important reason is performance driven. Nearly all professional investment managers start the year with a clean performance slate. This encourages more speculation than would otherwise be the case. As such, the more aggressive, higher-beta stocks often do better. Later in the year (around now), managers start getting ready for vacations and taking more time off. If they bet on stocks that subsequently became winners they have a tendency to not want to risk their good fortune during a period when they may not be able to pay as much attention. They'll move closer to an S&P 500 portfolio weight or move to more stable stocks, such as utilities or consumer staples. On the other hand, if they bet poorly they may be more concerned about being fired by a big client. In this case, they may go more conservative simply to avoid being the bottom manager. Early in the fourth quarter managers will realize they are nearing a new year (with a clean slate again) and increase the aggressiveness of the portfolio. In years when the market has done poorly, the bottoms are often reached in August and the period of aggressiveness begins sooner - in this case, it is more of a situation where managers are simply afraid of being left out of the fun during lift-off. Because of the prior poor market they often positioned their portfolios to conserve assets (or perhaps they capitulated) and now find they must play catch-up not only with the market but by increasing portfolio beta.