Investors have had to withstand a much tougher start to this year than last. As of early March, U.S. stocks were up or down by a nominal amount, depending on which benchmark you use. Meanwhile, Japanese and emerging market stocks’ performance has been worse.
Some investors looking for a catalyst to move stocks higher in coming months have pointed to the calendar. The thesis goes that markets tend to do better in the spring (think “sell in May and go away”), and therefore investors should look forward to better performance as we get into March.
While I believe stocks can move higher, I take issue with the notion that the spring season is likely to help. Here are three reasons why I caution investors against putting too much faith in the influence of the seasons.
- So far this year, seasonality has been backwards. Stocks typically rally in January and struggle in February. This year the pattern has been reversed. The S&P 500 plunged in January, losing more than 3.5%, only to quickly reverse those losses with a 4% gain in February.
- The spring isn’t a particularly positive time for markets. While April does display a positive bias in terms of market performance, the evidence on March is mixed. Over the past quarter century, March has indeed been a strong month, with an average return of more than 1.3% and a median return of nearly 2%. However, over the longer term, the record is less impressive. Going back to 1927, the average return for the S&P 500 in March is roughly 0.6%, right in line with the long-term average. Nor has the market been much more likely to go up in March than in other months – March’s “win rate” is 59% vs. 56% for all months taken together.
- As I’ve noted in the past, I place less faith in the calendar than others. While certain months do demonstrate a tendency to be positive or negative for stocks, the magnitude of that bias looks less impressive when compared against the normal variation in returns. In other words, once you adjust for normal volatility, few, if any, months demonstrate a statistically significant seasonal bias. The one exception: September. Over the long term, returns have tended to be unusually negative during the ninth month of the year. In contrast, the bias in the spring doesn’t look as significant.
For investors there’s a clear takeaway: watch the fundamentals. If the market is going to advance this spring, it will likely be because geopolitical tensions recede and we see an upturn in the economic data, confirming the thesis that this winter’s weakness was mostly due to unseasonably bad weather.
If we see a stronger economy, stronger guidance from companies, and rates remain relatively low, the market can advance. It’s unlikely, however, that the stocks will push ahead simply because the calendar turns.