How Seasonality Affects Investment Markets - dummies

How Seasonality Affects Investment Markets

Seasonality (also known as calendar effects) refers to the natural rise and fall of prices according to the time of year. Heating oil futures go up as winter heads for Chicago, for example, and prices of agricultural commodities rise when the crop is poor and fall when farmers get a bumper crop.

Interestingly, equities and financial futures exhibit a similar effect: They change according to the time of year. Here are a few regular and consistent changes that warrant your attention.

  • Best six months rule: Nearly all the gains in the S&P 500 are made between November 1 and April 30. This isn’t true without exception, but it’s been true for most years since 1950. When April 30 rolls around, you sell all your stocks and put the money in U.S. government Treasuries. Come November 1, you reenter the stock market.

  • January Barometer: When the S&P 500 is up in January, it’ll close the year higher than it opened. Since 1950, this rule has an accuracy reading of 92.5 percent.

  • President’s Third Year: Since 1939, the third year of a presidential term is always an up year for the Dow. In fact, going back 84 years, the only big down year in the third year of a presidential term was 1931.

  • Presidential Election Cycle: Wars, recessions, and bear markets tend to start in the first two years, while prosperity and bull markets tend to happen in the second two years. Since 1833, the last two years of a president’s term produced a cumulative net gain in the Dow of 717.5 percent, while the first two years produced 227.6 percent.