Seasonality

Author: David Kotok, Post Date: April 24, 2007
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“Sell in May and go away” says the old Wall St. adage.  “Should you obey?” asks Paul Lim in his New York Times column (Pg. 5, Sunday Money Section, April 22, 2007).

Paul Lim noted how the S & P 500 averaged a meager 1.6% for all the May-October periods since 1945.  And he also noted how the average for the other part of the year was an impressive 7.1%. 

The broad statistics about summer seasonal market weakness argue for selling.   The case becomes even more compelling when you add to those numbers the fact that the worst market months of September and October are included within that half year period.  On the other hand, the traditionally strong summer rally months of July and August are a mitigating factor.   So where does that leave us?

We have examined this traditional seasonal message with an added dimension.  We incorporated a review of the Federal Reserve’s policy actions.  We looked at what the Fed did and not what they said.  If they raised rates, they were tightening.  If they held them unchanged, they were neutral.  If they lowered rates, they were easing.   We examined the deeds and not the words.   

The Fed’s actions alter the old adage.  New rules should read that if the Fed is tightening, you should sell in May and run for the hills.   The weak May-October seasonal period has been particularly painful for stock investors when the Fed was raising rates.

When the Fed is easing in the summer seasonal period, you can ignore the negative seasonality.  Other factors may influence the markets in either direction but an easing Fed seems to remove any negative influence that would cause you to “sell in May.”

What about a neutral Fed.  That is what we currently seem to face?   Here the history is mixed which means there is no compelling case in either direction.  But there is one small factor to consider.

During most of the post World War Two period, the intentions of the Fed were mysterious and opaque.  Often the Fed’s policy changes were not discerned until transactions were observed by “Fed Watchers.”  The Fed did not issue guidance nor did they stress transparency.   That has become different in the Greenspan-Bernanke era. 

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