Historically, financial markets have exhibited certain seasonal patterns that studies have identified as statistical anomalies. Phenomena such as the Christmas rally, the January effect and other seasonal effects have attracted the attention of investors and analysts for decades. However, the increased efficiency of markets in recent years has caused these effects to lose strength and relevance.
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ToggleThe Santa Claus Rally: Christmas optimism
The Christmas season is approaching. The “Santa Claus Rally” describes the market’s tendency to rally in the last five business days of December and the first two days of January. This comes from the fact that, according to research by Yale Hirsch, founder of the Stock Trader’s Almanac, over this period, the S&P 500 has posted gains of around 1.4% on average, with positive results in approximately 80% of the years studied.
- Possible explanations:
- Seasonal optimism and Christmas spirit.
- Fiscal adjustments and year-end strategies.
- Reduced institutional presence, leaving the market in the hands of retail investors.
Although it is an interesting phenomenon, it should not be considered a guarantee of future performance, and this effect if it really existed just as the January effect seems to be dissipating.
In any case, this 2024 does not need a Christmas rally to end a very good stock market year.
The January Effect: does it still exist?
The January Effect has nothing to do with the “January slope”. In the investment world, it refers to the possible relationship between January’s performance and the performance of the rest of the year. Historically, it seemed that when January showed a loss, the performance from February to December was poor. Conversely, when January was positive, the rest of the year tended to outperform.
Source: Stocks For The Long Run: Jeremy J. Siegel (Sexta Edición)
However, this pattern has lost strength over time. According to historical data (1928-2021) presented in Stocks for the Long Run:
- In the period 1928-1994 (second table) the years with negative January recorded an average return of 0.18% between February and December, while the years with positive January achieved a much higher 0.66% (second table).
- From 1995 to 2021 (last table), even in years with negative January, the return between February and December has been positive on average, reaching 0.70% per month.
Thus, although even in the past it was not clear whether this was causality or chance, the relationship between January and the rest of the year has weakened over time, indicating that this effect no longer has the predictive power it seemed to have.
Other seasonal effects
Markets did not only show patterns in December and January. Other seasonal effects have been analyzed over time, although their relevance has also diminished:
- September effect:
- Historically, September has been the worst month of the year, with average negative returns.
- Explanations include asset liquidation after the summer or psychological factors, such as the end of the holiday period.
- “Sell in May and go away”:
- This stock market adage suggests selling stocks in May and returning to the market in November.
- It was based on the observation that returns tend to be weakest between May and October and strongest between November and April.
- While it has had some historical support, this effect has also lost steam in recent years due to increased market efficiency.
- Differences within the same month:
- Returns in the first half of the month are nearly three times higher than in the second half, according to studies of the Dow Jones Industrial Average.
- This trend has been accentuated since 1995, possibly due to automatic investment flows linked to payroll payments.
- Day-of-the-week effects:
- Monday has traditionally been the worst day of the week, especially prior to 1995.
- Friday used to be the best day in the market, although this trend has reversed in recent decades due to new hedging strategies and early selling.
- Better returns before holidays:
- Markets tend to register significant rallies in the days leading up to major holidays such as Christmas, New Year’s Day and the 4th of July (4th of July is the Independence Day in the United States).
- However, these effects have also lost momentum in recent years.
What should the investor do?
If you want to delve deeper into these potential timing effects, I advise you to read the chapter “Calendar Anomalies” in Jeremy Siegel’s Stocks for the Long Run which discusses most of them in detail.
As Siegel points out, while seasonal patterns are fascinating (we humans tend to seek control and meaning in what happens), they do not always repeat or offer guarantees. Many of these effects have disappeared or weakened due to investor anticipation and the increasing efficiency of markets.
“Historically, the upside of taking advantage of these anomalies has been small, and no one can guarantee that they will last over time.” concludes Siegel in his book.
Attempting to take advantage of these anomalies or market timing involves taking unnecessary risks. The key to success remains:
- Save and invest according to your financial objectives.
- Hold firm to these objectives, whether short-, medium- or long-term, avoiding speculation on time patterns.