It wasn’t a September to remember – unless you were a short seller, that is. If August was a weak month for large-cap stocks, September was downright anemic. Is this a prelude to a bumpy fourth-quarter ride, then?
Not necessarily. Recency bias might lead stock traders to fear that bad months will follow bad months, but historical data doesn’t seem to support this. So, as we finally bid a bitter adieu to an achy August and a soft September, let’s jump headfirst into Q3 with a sober look at October.
2023 Goes According to Plan, So Far
In the financial markets, seasonality can be loosely defined as the study of expected asset-path patterns based on historical tendencies. For example, data from 1950 to 2022 indicates that the S&P 500 tends to be flat or slightly negative in August, followed by a strong negative performance in September.
As it turns out, that’s exactly what happened this year. Indeed, the S&P 500 has been remarkably consistent in following seasonal patterns in 2023 so far. January was strong, February was weak, and March through April were decidedly bullish for large-cap stocks – just as seasonality would have indicated ought to happen.
Then, the old adage kicked in: “Sell in May and go away, and don’t come back ’til Halloween day.” The summer months, when stock-trading volume tends to be low and volatility ramps up, were generally bullish but sometimes turbulent this year. And as for August and September, it was better to just stay out of the financial markets altogether.
As might be expected, some sectors fared better than others. In September, the S&P 500 declined 4.7% while the tech-heavy NASDAQ fell 5.1% and the small-cap Russell 2000 index retreated 5.9%. Among S&P 500 subsectors, real estate performed the worst, sliding 7.2% into the red for the month; only oil/energy-sector investors were spared the September scourge, evidently.
October’s Spooky Reputation
Now we’re entering into October, which is known for ghost stories, mischief, and occasional stock-market implosions. It’s not an entirely unfounded reputation, as sharp large-cap stock corrections occurred in October of 1929, 1987, and 2008.
But then, let’s not overstate the long-term significance of occasional October meltdowns. From 1928 through 2022, the S&P 500 has actually gained 0.6% on average in October – not stellar, but not as spooky as one might expect.
So much, then, for the “don’t come back ’til Halloween day” part of the seasonality rhyme. Unless you’re anticipating a negative October surprise – due to a government shutdown, a sudden oil-price spike, or another black swan on the horizon – seasonality suggests staying the trade through the month.
Moreover, I you had to pick three consecutive months for seasonal strength, October through December would be a great choice (though November through January would also be a solid contender). Historical tendencies shouldn’t be your only guide, but if seasonal patterns continue to hold in 2023, the S&P 500 should stage a swift fourth-quarter comeback.
Stocks Needn’t Take a Fall in the Fall
In other words, studying seasonal trends shouldn’t induce autumn-time jitters in sensible investors. And by the way, I’ve heard that year three of the four-year presidential cycle is the strongest one. So now, seasonality aficionados can weigh multi-year patterns along with month-to-month trends.
Or, you can just relax and understand the purposes and limitations of seasonal patterns in the financial markets. First of all, they’re only averages and don’t always apply to current situations. There have been strong Februaries and Septembers irrespective of what seasonality would portend.
Furthermore, even if large-cap stocks have followed historical patterns this year so far, this doesn’t necessarily mean they’ll continue to follow seasonal trends in 2023’s final months. Again, recency bias can cause financial traders to see what’s not there and jump to hasty conclusions.
But again, maybe we ought to hope that Q4 sticks to the seasonal plan if October, November, and December are supposed to give the S&P 500 a nice year-end boost. As they say, however, hope isn’t a viable investing strategy.
At the end of the day, it’s fine to keep track of seasonal patterns just for the fun of it and, perhaps, as one tool among many for forward-looking stock traders. Just don’t consider it the be-all and end-all, as studying the seasons shouldn’t replace our use of reason.
