Posted 10/19/11 1:00 PM ET by Jason Goepfert
Seasonality Into Year-End
Investors put money into, and take money out of, the stock market at somewhat consistent times each year.
Tax deadlines, options and futures expiration dates, holidays, the lunar cycle and even weather patterns all play a part in determining regular seasonal cycles. This is only a minor factor in the stock market, but it's still fascinating to a lot of people.
We're about to head into a period that normally produces above-average returns. The Seasonality Index turns very positive at the end of this month, and stays so into the end of the year. Click here for more information about the inputs to that index.
From the chart below, we can see that the market has followed the Index fairly closely over the past couple of years. Again, it's only a very minor factor, but the cycles have played out well.
Part of the reason the Index is going to tick higher is the Presidential Cycle. The 3rd term of a president's run has usually led to higher prices for stocks, and that's especially been the case in the 4th quarter.
The table below shows how the S&P 500 performed following the Monday after October option expiration through the end of the year during the 3rd term of the Presidential Cycle. The options market wasn't much of a factor prior to 1983 or so, but we still use the 3rd Friday of the month as the starting point for this study.
This year is unusual in that the S&P is showing a negative return for the year so far (we have a few more days until options expire, so this could change). The only other year that had a negative return at that point was 1987, following Black Monday.
Out of all the years, 2011 has seen the worst drawdown so far. The S&P declined -14.5% from the last trading day in 2010. Only 2003 saw more than a -10% loss up to this point during the 3rd year of the Presidential Cycle.
Out of 15 years, only 2 gave negative returns into year-end, and both of them were minimal. On average, the S&P didn't decline any more than -2.7% at its worst point, but averaged more than +5% at its best.
Again, seasonality in the stock market is a minor factor, and more important considerations can easily trump any traditional yearly patterns (2009 was a prime example of that). At least stocks have a modest tailwind heading into the end of the year, and it's better than we've seen in some time.
Just for comparison's sake, here are the returns heading into year-end for the other years of the Presidential Cycle. They're all positive, but less so than the 3rd term has been.
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