In our last market update we started the discussion of seasonality and pointed out that historically September and October are poor months for stocks. Unfortunately, that held true again this year with both months posting declines for the major averages. The good news is that as the holidays approach we will be heading into the most bullish time of the year. In fact, since 1950 nearly every dollar earned in the Dow Jones index happened during November through April. If you had invested $10,000 in November of 1950 and sold at the end of April and reentered the market the next November and did this every year, your initial $10,000 would be worth more than $1.2 million today. If you invested at the opposite time, you would have made virtually no money at all over the past 73 years. We don’t mean people should actually go out and start investing like this, since in any given year markets can do wildly different things, not to mention the tax consequences that would be incurred. However, it is meant to illustrate that human behavior and investment behavior are different during different times of the year. Daily life changes and yearly cycles impact all of our behaviors, including investment behavior.
This week marks the beginning of what is historically the most lucrative six-month period of the year with the strongest months being November through January as investment behavior, in a sense, gets more cheery. Compounding this seasonality trend is another historically bullish cycle we are entering: the presidential election year cycle. Typically, incumbent administrations will do everything they can to juice the economy and put off politically unappetizing, painful economic decisions until after the election or let the new administration deal with it.
To further put the recent seasonal weakness we’ve seen over the past several months into context, a 10% drawdown in the stock market within any given year takes place 63% of the time. It would be unusual not to see a pull-back of this size. It’s worth mentioning that the drawdown we are currently experiencing (since roughly the end of July) is now very close to reaching oversold levels that have historically led to significant short-term bounces. Perhaps the Fed meeting next week will trigger one of those rallies? No one knows for sure, but several pieces are falling into place to allow for a profitable quarter and a shift in investor sentiment and behavior. For example, the Fed’s preferred measure of inflation, Core PCE, moved down to 3.7% in September. This was the lowest level since May 2021. The Fed funds rate of 5.25% is now 1.6% above inflation. This is the most restrictive monetary policy we have seen since 2007 and likely means the Fed is done tightening. Ending the interest rate hike cycle would be welcome news for the overall stock market, and especially good for young companies and high-tech stocks that rely on borrowing to fuel growth.