Strong Seasonals Return After Red October

Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Wednesday, November 1, 2023

Even after a red October provided more trick than a treat for stock market investors, we continue into what has historically been one of the strongest periods for stock market seasonality.

A red October was the third consecutive month in a row that the S&P 500 was lower. August and September have never been good for stock market seasonals but historically, and especially in recent years, October has had a fairly solid track record for stocks—not the case in 2023 as the S&P 500 fell 2.2% during the month. The good news is that from a seasonality perspective, looking at data back to 1950, November has been the strongest month and the start of both the strongest two-month, and six-month periods for stocks.

November is the best performing month since 1950 and second best month over the past five and 10 years.  Furthermore,  only one of the past 11 Novembers has the S&P 500 been down over the month (in 2021), though in the midst of overall impressive average returns (+1.7% monthly return since 1950) November has also had its share of big down months, notably in 2008 (-7.5%), 2000 (-8%), 1987 (-8.5%) and 1973 (-11.4%).

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November-December is also the strongest two-month period on average looking at all periods back to 1950 but this two-month pairing has been often been relying on November in recent years as December’s “Santa Claus Rally” returns have been mixed.

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Looking at six-month return windows, November-April is also the strongest of these looking at all periods back to 1950 and over the past 20 years. In recent history over the past five and 10 years, this pattern has broken down somewhat with the November-April returns more middle of the road and the strongest six-month period being March-August. Over all periods since 1950 the old stock market adage of “Sell in May” appears to have some credence as the May-October does have the weakest returns of all six-month periods, but in recent years this has also shifted somewhat and September-February has been the weakest six-month stretch over the past five and 10 years.

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When studying the proportion of positive monthly returns since 1950 November has posted a positive return around 69% of the time.  The only months that have historically finished in the green more often are April and December.

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October’s negative return meant stocks finished down three months consecutively for the first time since the midst of the COVID-19 outbreak at the start of 2020, and prior to that in 2016. Taking a look at how stocks performed after such occurrences the good news is that if October turns out to be the end of the run of negative months, then the S&P 500 return one year out following such an inflection is well above average with a 17.9% rebound versus an average of 8.9% for all periods. If the negative run of monthly returns continues past three months, then the returns a year out are below average (perhaps unsurprisingly given this period includes at least one negative month to start) but are still positive more often than not and have a healthy median return. If the run of negative months stops at four or five, then the returns a year out are still strong as on average stocks bounce back over the following 12 months. The longest run of consecutive down months since 1950 was 9, occurring from January to September 1974 (during which time the S&P 500 was down 35% but went on to recover 32% over the next 12 months).

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In summary, though somewhat mixed, overall historic stock market seasonals are still pointing to a supportive environment for stocks coming into the year-end. Three consecutive months of selling pressure may have also exhausted sellers and left stocks approaching oversold levels. We do maintain our outlook of a slight preference for fixed income over equities in our recommended tactical asset allocation (TAA), but this is more a function of fixed income valuations remaining relatively favorable over equities due to their attractive yields. We see this as a reason to temper enthusiasm for equities, but not to be bearish, remaining neutral, sourcing the slight fixed income overweight from cash, relative to appropriate benchmarks.


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