As we move into the month of May, we are once again reminded of the tendencies of market seasonality. The seasonally strong period that we just completed was just that – strong. Sparked much by the election in November, broad market U.S. Equity indices like the S&P 500 Index SPX, Dow Jones Industrial Average DJIA, and Nasdaq Composite NASD all rallied to achieve highs on multiple occasions from November through April. All told the S&P 500, the Dow, and the Nasdaq gained 12.14%, 15.42%, and 16.54% from October 31st to April 28th. Although we recently experienced an exhale or pause for equities, we move into the seasonally weak period on the wings of a market environment where leadership is within those same equities. We have discussed seasonality many times over the years, and as we enter another of those seasonally biased periods (May through October), we want to revisit the subject today.
We are now entering what is typically considered the "weak six months" of the year. Years ago, we began using The Stock Trader's Almanac, published by Yale Hirsch, and it has served as a fantastic source of information on the stock market. The premise of their "Market Seasonality" study is essentially that the market has historically performed far better during the November through April time period than it has from May through October. On its own, that isn't a particularly profound statement or a particularly bold assertion, but when we examine the magnitude with which this effect has been chronicled over the years, it becomes a very significant underpinning indeed. Consider this, if you would have invested $10,000 in the Dow Jones on May 1st and sold it on October 31st each and every year since 1950, you would have lost money over the last 67 years! This is to say that the entire growth of the Dow Jones Industrial Average since 1950 has effectively come in the "good" six months of the year.
Below we have reproduced the Six-Month Switching Strategy, first published by Stock Trader's Almanac, beginning in 1950 based upon the Dow Jones Industrial Average. The first data set reflects the April 30th through October 31st period, while the second column shows the remainder of the time, October 31st through April 30th time frame. You will note that on a compounded basis, a theoretical $10,000 initial investment in 1950 is actually down during the April 30th - October 31st period using data through October 31st, 2016. On the other hand, in looking at the seasonally strong period between October 31st and April 30th each year, an identical $10,000 initial investment grew to $985,024 with an average rate of return of 7.55% in each of those six-month periods through April 28th, 2017.
Source: Dorsey, Wright & Associates, LLC. ®
Source: Dorsey, Wright & Associates, LLC. ®
There's no question that the November to April period has provided substantially better returns. Whether you average it out, annualize it, compound it, or complicate it further; there is clearly a wide spread between the average six-month returns during these contrasting seasonal periods. The strong six-months of the year have virtually kept pace with the average annual compounding return of the Dow overall since 1950. The Dow began 1950 at $200 and closed April 28th, 2017 at $20,940.51, producing an average annual compounded return of about 7.19%. The seasonally strong six-months of the Dow has been comparable with a return of 7.09%, and the Index has done so while having been invested only 50% of the time; leaving the other 50% of the year to be invested in risk-free yield-bearing vehicles to enhance returns further if one so chose.
Along the way there have been down periods in the seasonally strong stretch, and up periods in the seasonally weak period, but what we are referring to is simply a historical bias. Yes, this strategy does have a very strong historical bias to it, but it is not a "be all, and end all" means of risk management. We enter a seasonally weak period again this time around with US Equities in the leadership position in DALI, at the #1 spot.
*Information provided by Dorsey Wright & Associates with permission. Past performance may not be indicative of future results. There is no assurance these trends will continue. Performance does not include transaction costs, which would reduce an investor's returns. The Dow Jones Industrial Average is a composite of 30 major industrial companies, is unmanaged and cannot be invested in directly. The index is a price-weighted average of the issues in the index. This means higher priced securities are weighted more heavily. Dividend payments and company stock splits put downward pressure on this index. Investing involves risks and you could incur a profit or a loss. This strategy is not suitable for all investors and would increase portfolio turnover and commission and fees due to the purchase and sale of the stocks in the Dow Jones Industrial Average.