‘Tis the Season(ality)

Kelly Park Capital
#alternativeinvestments, #investing, privatemarkets

In the intricate tapestry of financial markets, seasoned professionals are well aware that patterns and trends often dictate investment strategies. One phenomenon that has piqued the interest of financial experts is the seasonality in the performance of stock and bond markets. As the calendar pages turn, so too do the fortunes of these markets, and understanding the reasons behind these seasonal fluctuations can provide valuable insights for investors.

Seasonality in financial markets refers to the recurring patterns and trends that occur during specific times of the year. This phenomenon manifests in both the stock and bond markets, offering financial professionals an additional layer of complexity to navigate. While it may be tempting to dismiss seasonality as mere coincidence, numerous studies have shown that there is a real and statistically significant impact on market performance during certain periods.

Stock Market Seasonality:

  1. The January Effect: The stock market often experiences a surge in January, a trend known as the "January Effect." This phenomenon is attributed to year-end tax considerations, as investors engage in tax-loss harvesting in December and then reinvest in the market in January.
  2. Summer Doldrums: Historically, the summer months have been associated with lower trading volumes and subdued market activity. Some attribute this to investors taking vacations, resulting in reduced market participation and liquidity.
  3. The Santa Claus Rally: Towards the end of December, markets may experience a "Santa Claus Rally." This period is marked by positive sentiment and increased buying activity, possibly fueled by holiday optimism and year-end bonuses.

A fascinating scholarly paper published in 2021[i] analyzed the stock performance of various countries on a month-by-month basis over multiple decades and drew some interesting conclusions; the United States snapshot is included below:


For the United States:

  • Highest Monthly Average Increase: April +0.79%, Up 60.70% of Time
  • Lowest Monthly Average Increase: September (-0.27%),
  • January Up 51.97% of Time
  • Greatest Single Monthly Increase: April 1933 (+34.71%)
  • Greatest Single Monthly Decline: September 1931 (-28.04%)
  • Highest rolling Quarterly Average Increase:
    • November-January +1.61%
    • October-December: Up 65.79% of Time
  • Lowest rolling Quarterly Average Increase
    • August-October +0.46%
    • January-March: Up 52.40% of Time
  • Highest Monthly Average Increase Since 1900:
    • April +1.34%
    • December: Up 71.67% of Time
  • Lowest Monthly Average Increase Since 1900: October 0.46%, S

Bond Market Seasonality:

  1. Interest Rate Influences: Bond markets are particularly sensitive to interest rate changes. Seasonal factors, such as central bank policy decisions and economic data releases, can impact interest rates and, subsequently, bond prices.
  2. Quarterly Corporate Earnings: Bond markets can be influenced by quarterly corporate earnings reports. As companies release their financial results, investors may adjust their bond portfolios based on the perceived creditworthiness of issuers.

Bond market seasonality is not limited to credit-sensitive instruments, it has been observed in sovereign bond markets as well. Discovered originally by Heston and Sadka (2008), it has been subsequently documented in numerous asset classes and factor strategies (Heston and Sadka, 2010, Keloharju et al., 2016). Importantly, Baltussen et al. (2018) and Zaremba (2019) have proved the cross-sectional seasonality effect also in international government bond returns. One 2019 academic paper posits “…the government bond seasonality phenomenon might be linked to salient macroeconomic risk. The macroeconomic risk premia can accrue unevenly during the calendar year. Subsequently, these underlying macroeconomic seasonalities may be transferred to the government bond returns, leading to the emergence of the cross-sectional seasonality anomaly in government bond returns.” In other words, macroeconomic risks vary throughout the year, and this variation might affect government bond returns differently at different times. Essentially, the paper is proposing that the seasonality in government bond returns could be influenced by the ups and downs in overall economic risk during different periods of the year.

The Why Behind Seasonality:

  1. Behavioral Factors: Investor behavior plays a crucial role in market seasonality. Psychological factors, such as herding behavior and sentiment shifts, can contribute to seasonal trends as investors react to perceived opportunities or risks.
  2. Economic Cycles: Seasonality is often linked to broader economic cycles. Economic indicators, such as consumer spending, employment data, and inflation rates, can impact investor confidence and influence market performance during specific seasons.

In conclusion, recognizing and understanding market seasonality is a valuable tool for making informed investment decisions. While historical patterns can provide a guide, it's essential to approach seasonality with a critical eye, considering the evolving economic landscape and the impact of unforeseen events. Ultimately, mastering the nuances of seasonality in the stock and bond markets requires a combination of historical analysis, economic insight, and a keen understanding of investor behavior. As financial professionals navigate the dynamic world of finance, staying attuned to seasonal trends can be a key factor in achieving success in the ever-changing landscape of investment markets.

1. Seasonality in the Stock Market Bryan Taylor, Chief Economist  Global Financial Data, 2021

2. Economics Letters Volume 176, March 2019, Pages 114-116; Return seasonalities in government bonds and macroeconomic risk

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