Seasonal trends can be identified across various economic industries, and these trends correlate to when businesses may be growing or slowing on a recurring basis year after year. Consider how electricity companies typically see a surge in demand during summer months when customers are relying more heavily on their air conditioning, while gas suppliers experience a corresponding decrease in demand. Likewise, retail giants like Amazon witness a significant spike in consumer spending around the holidays, exceeding their regular activity throughout the year. These predictable patterns, known as market seasonality, offer valuable insights for businesses and investors.
In a previous post, we explored the “Santa Claus Rally,” a prominent example of seasonality within the financial markets. We encourage revisiting that post for a foundational understanding before delving deeper into the broader implications of market seasonality below.
Defining Market Seasonality
Market Seasonality refers to recurring periods of time when the stock market has similar performance year after year. There can be many reasons behind these trends in the stock market. Some include fluctuations in trading volume around holidays, focused trading around economic/company data releases, or timelines related to tax filing/contribution deadlines.
Market participants and analysts typically include these types of seasonal factors when making investment decisions. Seasonality is not guaranteed to produce similar results every year, but the frequency is high enough to influence investment decisions around these periods of time.
The Santa Claus Rally: A Case Study
The Santa Claus Rally refers to how the stock market typically performs well around Christmas and New Year. Many analysts and traders take time off for the holidays, which results in less market volume. Lower volume can tend to lead to better performance since there will be a reduction in the shares that are being sold.
This time of year also correlates with end-of-year bonuses for employees and end-of-the-year contributions to various retirement plans for tax purposes. This combination and additional factors can potentially rationalize why this time of year tends to be positive from an investment standpoint.
Utilizing Market Seasonality
We do utilize Market Seasonality when reviewing the investment decisions within our in-house actively managed portfolios. We have indicators that are built around these seasonally strong/weak periods of the year and are alerted to when the indicators suggest getting in and out of the market.
Of course, it is not the only indicator we use, and it is considered an overlay on some of our stronger, longer-term indicators. We believe a balanced analytical approach to investing is potentially the best solution for our clients, so we do not want to overlook something as useful as Market Seasonality.
Market Seasonality – Highlights
- Market Seasonality refers to recurring periods when the stock market has a similar performance year after year.
- Seasonality is not guaranteed to produce similar results yearly, but the frequency is high enough to influence investment decisions around these periods.
- The Santa Claus Rally refers to how the stock market typically performs well around Christmas and New Years.
Speak With a Trusted Advisor
If you have any questions about Market Seasonality, your investment portfolio, taxes, retirement planning, our 401(k)-recommendation service, or anything else in general, please call our office at (586) 226-2100. Please also reach out if you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation.
Feel free to forward this commentary to a friend, family member, or co-worker. We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Best Regards,
Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, and James Wink.
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