Can seasonality help you anticipate the stock market?

Portfolio manager explains how seasonal investing can inform a sector and broad market strategy

Can seasonality help you anticipate the stock market?
Brooke Thackray

We are currently at the stock market’s lowest ebb of the year, or at least we should be. According to Brooke Thackray, research analyst at Horizons ETFs, looking at a 70+ year view of broad-market data, September is typically the lowest month of the year, and the later weeks of September are the lowest weeks in the month.

Brooke Thackray is a longstanding proponent of seasonal investing. His research is key to the Horizons Seasonal Rotation ETF, which applies a seasonal approach.

Seasonal investing, Thackray explains, comes down to using trend data going back decades to inform stock and sector allocations. The approach consists of multiple layers of analysis, but at the top level it begins with a 6-month cycle in broad markets. According to Thackray, markets tend to perform better between late October and early May and underperform between May and October.

“That six-month cycle, some people call it ‘sell in May and go away,’ or the Halloween effect,” says Thackray. “But there’s also a component where different sectors of the market tend to perform well at different times of the year.”

Thackray’s broad-market research goes back to 1950 to inform his 6-month cycle thesis. His sector-specific focus goes back to the 1990s, when markets were broken down by sector for the first time. He admits that ‘seasonal’ is somewhat of a misnomer, as trends in broad markets and sectors rarely match spring, summer, winter, and fall. What it means, however, is that we can expect certain sectors to perform better at certain times of the year, and use that expectation to move into a trend before everybody else does.

Thackray cites the retail sector as an example. Where most people might think the retail sector performs best between Black Friday in November until Christmas, a seasonal analysis demonstrates that the retail sector actually performs best from October 28th until Black Friday, and the sector tends to dip again between Black Friday and Christmas. Thackray notes that a technical analysis can inform a more specific decision year-on-year, but by looking at seasonal trends an investor may be better able to anticipate an investment trend.

“The best way to think about seasonal investing is as behavioural investing,” Thackray says. “Because, really, you’re taking advantage of investor behaviour.”

While many of the historical trends that impact sectors every year have stayed the same, some have changed. Thackray noted that gold behaves differently than it did 20 years ago. India is the world’s biggest consumer of gold jewellery, and the period leading up to Diwali—where gold is often given as a gift—was a historically strong time for gold. In the past 20 years, the rise of China and greater freedom to buy gold now means the leadup to Lunar New Year represents an even stronger trend in gold prices.

A seasonal approach is not blind to short-term factors, Thackray insists. Interest rate increases, government policy announcements, decisions by massive commodity movers like OPEC can all send markets or sectors in directions far outside their seasonal norm. However, by comparing contemporary performance with seasonal trends, Thackray believes that advisors can get a clearer picture of where the market currently stands.

Advisors can also use that seasonal data to give clients context and a deeper understanding of where their portfolio sits at any time. Given the short-term concerns clients can sometimes raise, a view of seasonal trends can help situate a period of apparent underperformance within the bounds of normal market movements.

Thackray sees seasonal investing as neither bullish nor bearish. Instead, he considers it a form of long-term investment discipline. It allows an investor to view corrections or bull runs within a historical context. That viewpoint can then inform whether a certain short-term market movement is an opportunity or a risk. He believes such a view has been helpful over the past three years, which have been anything but normal. Seasonal trends have still played out, and secular market impacts could be judged within that context to help with decision making.

“If [advisors] look at the seasonals, they can give you a good time to help establish an early positive trend when you when you're starting to get into a sector. It can actually help with that buy decision,” Thackray says. “And on the flip side to that, they can also take a look and say, ‘I need to reallocate I've got too much weight in a certain sector, how does that work with seasons?’

“It can be used to help with decisions.”