By Giles Coghlan, Chief Currency Analyst at HYCM
Every year, as the summer months approach, the old Wall Street adage ‘Sell in May and go away’ is often brought up by stock market commentators. As with other general rules, some investors might be tempted to dismiss the axiom as an old wives’ tales – however, this sentiment has held up well throughout history.
Although there are some exceptions, and this year may prove to be one with so much stimulus in global financial markets, the adage has been broadly true of over 65 different countries where historical data is available. The subject has been long researched by economists, and according to statistical data spanning multiple decades, there is a longstanding tendency for stocks to underperform in the six-month Summer period, beginning in May and ending in October, and gain during the Winter period – and this can be seen in the seasonal pattern of average monthly changes in US share prices using the S&P 500 index.
Typically, if an investor were to follow this strategy, they would divest their equity holdings in May, and invest again in the Autumn.
Such phenomena might leave investors and traders scratching their heads. Naturally, as human beings, we are creatures of habit – our behaviours, and certainly our financial decisions, tend to echo the past. The key factor behind these seasonal patterns is the regular ebb and flow of investor demand for shares, relative to their supply through the course of the year, as well as notable seasonal events that might impact our behaviour, year on year.
So, with all this in mind – what seasonal patterns should investors be monitoring at the moment, now that we are settling into the summer months?
Sometimes, these effects can be attributed to weather patterns – it stands to reason that if there is a drought, or a particularly hard frost, for example, that this might impact the price of commodities such as wheat, corn, or soybeans. Historically, there have been 15 falls in 21 years from mid-July to August with soybeans alone, so investors should note this pattern. Likewise, harvest periods have a similar effect, with commodities and crops in particular being harvested around the same time each year, which in turn will impact prices.
Notably, interest payment timings can also contribute to these seasonal patterns. Often, bond yields will be paid at a certain time each year – it is therefore logical that when these bond yields are paid to major investment companies, we also see large inflows into equity markets.
Investor sentiment also has a part to play. Looking ahead to the winter months, for instance, there is a phenomenon called the ‘Santa rally’ that occurs around Christmas time, which sees stocks rise as consumers embrace the Christmas spirit – a sentiment that again makes its way around into equity markets, with strong gains in the FTSE100, FTSE250, the S&P500, as well as strong dollar outflows for USD.
At the moment however, investors would be wise to monitor seasonal patterns for pharmaceutical and biotech stocks, which tend to make strong gains throughout the summer period, due to the publication of clinical studies in July and August. Particularly as the COVID-19 situation evolves, these stocks will likely see high demand this time of year, as new products come to market, and investors lay their hopes on vaccines.
Crucially, there are tools that can help investors and traders when it comes to seasonal trading patterns. For instance, earlier this year HYCM added Seasonax to its services, a leader in seasonal trading pattern analytics, to help their traders more easily identify and analyse seasonal patterns in stocks, commodities, indices, and FX. As a result, traders can quickly identify trading opportunities and ultimately, make more sound investment decisions.