COTW: Stock Market Seasonality: As Helpful as Weather Forecasts

COTW: Stock Market Seasonality: As Helpful as Weather Forecasts

The chart below can be downloaded here


Seasonality is commonly referred to as “a characteristic of a time series in which the data experiences regular and predictable changes that recur every calendar year”.  The dashed line in the chart below shows the average daily returns for every calendar year from 1984 through this week. The shaded area on the right axis shows the same data, just on a zoomed-in scale.  If we look at the average annual returns for the last 35 years, there does appear to be a seasonal pattern; however, if we look at the underlying data, finding regular and predictable pattern becomes far more challenging… arguably impossible.


Averages can mask meaningful volatility in the underlying data that reduce the statistical utility of lumping everything together. As such, forecasts based on averages and the patterns they create should always be taken with a grain of salt. Cue the joke about the statistician who drowned crossing a river that was on average only 6 inches deep.


With that important caveat aside, the seasonal pattern most relevant this time of year is the December rally that tends to, on average, drive gains for stocks from mid to late November through the end of the year.  We still believe the December rally is something to consider, especially in the context of risk management or tax-loss harvesting, but we would advise against making long-term allocation decisions based on this data.




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