On the Cash: Seasonality In Shares with Jeff Hirsch of the Inventory Dealer’s Almanac. (Dec 20, 2023)
How do historic patterns and seasonality have an effect on equities? Can these patterns efficiently inform future investments? On this episode, I converse with Jeff Hirsch of the Inventory Dealer’s Almanac to debate seasonal patterns in equities. He’s devoted a lot of his profession to the research of historic patterns and market seasonality along side basic and technical evaluation.
Full transcript beneath.
About Jeff Hirsch:
Jeffrey Hirsch is editor of the Inventory Dealer’s Almanac & Almanac Investor E-newsletter.
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Seasonality is the phenomena the place throughout sure occasions of the yr, markets behave virtually predictably. It’s rooted in the concept buyers and companies and financial cycles have common patterns. These patterns aren’t fairly as common because the phases of the moon. They don’t all the time work. However mixed with different components, they’ll tackle a lifetime of their very own.
I’m Barry Ritholtz. And on today’s edition of At the Money, we’re gonna discuss what you need to know about market seasonality. To help us unpack all of this and what it means for your portfolio, let’s bring in Jeff Hirsch, editor in chief of the Stock Traders Almanac, who’s been studying seasonality just about his whole life. Jeff, welcome.
Jeff Hirsch: Hey, Barry. Great to be with you.
Barry Ritholtz: So let’s talk a little bit about this. I mentioned certain things happen every year. People raise money to pay taxes. They pay taxes is certain times of year. They make regular contributions. What does the data you study say about seasonality?
Jeff Hirsch: It says that people are creatures of habit, and it’s a behavioral finance, uh, at its core where people are doing the same things over and over on a regular basis. You mentioned in the intro the 401k contributions. One of the things that I learned early on when I started working for my father was About that that mid-month spike.
So he had promoted a pattern for years, the best five days of the year, the monthly five day bulge, which is the last trading day of the month, and the first four of the new month, which is when people pay their bills and make all their transactions on a monthly basis. And then I used to do those numbers by hand using the Barron’s MarketLab pages and, you know, underlining stuff and using an anti machine and all that by hand work, which was Educational. But there we are looking at the pattern. We see it change. There’s a spike mid-month.
And we’re looking at each other, and we’re talking about it, and we realize that that was this New pattern of people with the payroll deductions going into the market, and fund managers have to be long. So there is this spike where cash is coming into the market the middle of the month, and you have that sort of super eight days of the month now where you have the middle three and the last two and first three that become that Seasonal patterns.
Barry Ritholtz: My partner, Josh Brown, calls that the relentless bid. Your dad, Yale Hirsch, founded Stock Traders Almanac. Gee, is it sixty years ago. How long ago was it?
Jeff Hirsch: It was, uh, nineteen sixty six, the year of my birth. (Wow. That that’s absolutely amazing). Born, bred, weaned, raised on all these patterns.
Barry Ritholtz: So one of the things that he has discussed and and you’ve written about continuously is, hey. It’s not just the calendar. You have to look at things like technicals, fundamentals, sentiment, fun flows, monetary, etcetera. How do you sort of take all these different factors and combine them with seasonality?
Jeff Hirsch: Well, I mean, right now, in 2023, seasonality, the four-year cycle, the president’s cycle are firing on all pistons. It’s it’s It’s almost too easy. It’s not always gonna be that way. But we are always combining fundamentals, macroeconomics, monetary policy, and technicals is with sentiment, and you’re looking at it. And it depends upon, like, any fund manager or any trader, which factors are leading and driving the market at any given time. And we’re always looking for for things that are, um, you know, outliers, the things that people aren’t thinking about.
Contrary thinking is is is part of it. But At our core, it’s always about cycles. People are creatures of habit. You know, they do things, uh, on a regular basis every day. Meaning, people get Up the same time.
They have lunch the same time. They go to bed the same time. The market closes the same time. It opens at the same time, and you see these patterns continually persist. So that’s sort of our bias, but we look at, you know, technical setups. One of the key things is if the market or the stock or the sector is tracking that pattern closely, then, you know, gains, beget gains or losses, beget losses. And if it’s if it’s Diverting, that’s when we might not take advantage of a seasonal pattern because it it hasn’t come in setting up correctly or or tracking the pattern closely.
Barry Ritholtz: So we’re recording this a few weeks before Christmas. Let’s talk about some of my favorite seasonal patterns that you write about in Stock Traders’ Almanac. Santa Claus rally. What’s happening with that?
Jeff Hirsch: Everybody gets it wrong year in, year out. Yale, my father, created this, Devise this this indicator back in 1972. It came out in the ’73 Almanac. It is this tendency for the S and P five hundred to gain one Point three one and a half percent, not a huge number, over the last five trading days of the year and the first two of the new year.
It’s not the rally, the year-end rally, or the fourth quarter rally from Halloween to January that everyone likes to use that that for for their (best few months of the year). It’s not the best few months of the year. It is this indicator. And as Yale Everyone forgets who created the you know, he was a songwriter, Barry.
He he could coin a phrase, my father. Um, it the line is if Santa Claus should fail to call, theirs may come to broaden wall. And what that means is that during that last weekly year when, you know, you might be away, I might be doing some family things, and The the pros are on this you know, on their desk buying up bargain stocks that were sold for tax loss selling. If they’re not doing that and the market doesn’t rally during that time, it’s An indication that things are are amiss.
Barry Ritholtz: So let’s talk about the January effect. What does that mean?
Jeff Hirsch: Well, the January effect is not to be confused with the January barometer. The January effect is a tendency for small caps to outperform large caps in January. And as we show in the almanac, Most of that January effect is really the December effect now.
Barry Ritholtz: They dump those stocks in December, and now they’re buying them back.
Jeff Hirsch: And we’re right as we’re speaking here, we’re coming into that A December period where small caps start to take off versus large caps. We’ve seen the Russell two thousand already begin to to perk up as it does around the end of October. But the The January barometer, which is the other seasonal indicator, is as January goes, so goes the year. Another Yale invention in at the same time in seventy two. And, You know, we’ve seen January take, uh, take it on the chin a bit in recent years.
Barry Ritholtz: I saw a really interesting analysis of the January barometer that said it’s not limited to January. It’s essentially a momentum measure. Any strong month usually leads to another strong month.
Jeff Hirsch: Um, there is the gains beginning gains. We’ve we’ve compared all the monthly barometers, uh, of every single month.
(You like January the best). Not just like it, but, you know, we’ve looked at it from the the the subsequent eleven months, the subsequent twelve months, and the whole year. And the thing that happens in January is that It’s the beginning of the year. (Sets the tone). It sets the tone.
You’ve got and the reason why the January barometer works is the is the 1933 lame duck amendment to Congress. When they passed this, uh, newly elected senators and congresspeople were would take office thirteen months later Right. After they were elected, hence, lame ducks. Um, and then and presidents were also inaugurated in March. There was a whole period where, you know Now it’s January.
Right? Winter was Tough back in, uh, you know, the colonial times to get to DC. So, um, it moved inauguration to January twentieth, new congresses convening to the first week of January, Right. And everybody, including, you know, present company here, makes forecasts, outlooks, sets agendas, and precedents. You have states of the union State of the Union addresses, um, and a lot of forecasts.
Barry Ritholtz: So it tends to be an optimistic time of year.
Jeff Hirsch: It tends to be optimistic, but also it’s The time where people are looking to the future.
Barry Ritholtz: So you mentioned, um, uh, congress and and presidents. Let’s talk about the presidential election cycle. I know you’ve been writing about this for as long as I know you. We’re in the third year of a president’s term. That is your favorite time of year.
Jeff Hirsch: It is the most bullish year, but I wanna I wanna just Finish one thing on January if I can. There’s a a new a new wrinkle we’ve added to it. Since January has has had some trouble recently with a lot of profit taking.
We’ve taken the old first five days of the year, which the early warning assessment. It’s also in the Almanac, plus the Santa Claus rally, plus the full month January barometer, Created something called the January indicator trifecta. Since nineteen fifty, when the three are up, the Santa Claus rally, first five days in a full month, The S and P has been up ninety point three percent of the time, twenty-eight to thirty-one years for an average gain of seventeen and a half percent.
Barry Ritholtz: That’s pretty pretty big. Pretty good numbers. How did the numbers look last year after we made those lows in October of twenty two? Did you have the trifecta one?
Jeff Hirsch: We hit the Trifecta in twenty three. Guess what? Twenty two? No. It’s trifecta. In a midterm year, which segues back to your question about the four year cycle, which, you know, you you talked about Things happening on a regular basis. There’s only one country in the world that re that elects its leader on the same day every four years. That’s the United States. Everyone’s got these parliamentary.
Barry Ritholtz: Call for an election. Yeah. It’s a week later, and they’re done. So Which by the way, in America, that doesn’t sound too bad. Get it over in a week.
Jeff Hirsch: Well, we can get into politics and ideology, but the the cycle here is, you know, the the the pre election year is the best year of the four year cycle, up about sixteen Point eight percent in the S and P. This is nineteen fifty. We see the midterm lows that move from the midterm low like we had last year. (Worked really well). Yeah.
I mean, average gain’s about forty eight percent for the, um, Dow from the midterm low to the pre election year high, and it’s about sixty eight percent for Nasdaq. And what I’ve seen and what I show when I when I when I present to people is that amazingly, you know, there’s a good cluster of lows in the Oct midterm October as we know that October is a bear killer and another one of Yale’s phrases, but a lot of the highs the yearly highs Occur in December, and a good chunk of them on the last trading day of the pre election year.
Barry Ritholtz: Now how much of that is just window dressing, and how much of that is just people have cash that they have to allocate in the calendar year, and they’re just putting it to work.
Jeff Hirsch: I think it’s a lot of both of those.
I mean, window dressing happens every year. Window dressing in September is what creates the negative period. In September, (the the fiscal year that ends September thirtieth). Also the October thirty first mutual fund deadline by the IRS where you gotta file you gotta reconcile your accounting for the ten months and the twelve months and, You know?
Barry Ritholtz: So let’s talk about what I know as your all time favorite, um, seasonality factor.
Jeff Hirsch: Sell in May and then go away. I always say you gotta buy in October to get your portfolio sober. So, uh, again, this was something that you know, David Aronson He’s a technical, uh, technician through the CMT organization as well as as, uh, Baruch College. He did a book in o eight, Which was our best investment book of the year called, uh, Evidence Based Technical Analysis. (Oh, sure. I remember that).
So what he did was he took Six thousand plus about sixty-two hundred different black box systems and put them through the scientific method, which I had to learn what that is, that Testing the null hypothesis. Taking it out of sample, running it against other issues, not just cherry-picking the best assortment of dates. (Right). And seeing if any of these systems had predictive power or were just a result of chance.
So when we picked that book, we said, David, can you take the best six months and do the same thing? So he took it from Yale Invented that strategy, the best six months switching strategy in was in nineteen eighty-six in the eighty-seven Almanac. So he took it from eighty-seven forward So that there he didn’t have any of the backtest bias in it. And he found that unlike any of the other six thousand plus different black box systems, the best Six-month switching strategy had predictive power, and the results were not the result of chance. So it is one of the main overlays we have, Uh, in our, you know, newsletter and portfolio construction that we do.
Barry Ritholtz: So rationalize this. What is it about May, June, July, August, September, that seems to be so meh.
Jeff Hirsch: Well, I mean, I mentioned the the October thirty first mutual fund fund deadline, which Create that sort of low period. But you have the you know, most of the human race most of human beings live in the northern hemisphere. Right. Most of the landmass is up there.
So we have, you know, this period of time where, you know, there’s a lot of light from May through September. Right. And we do a lot of other things. I’ve seen you go on fishing trips. I play a lot of golf. My kids go to camp. People go on vacation. Okay. (And, you know, everyone is distracted elsewhere).
And, you know, when you have lower volume, stocks tend to go down, Um, especially, you know, after you’ve come into the the q four and q one with all that extra money and all that extra buying. So it’s a it’s a Not a vicious cycle, but it’s a regular cycle of the flow of cash and money in and out of the market. And people try to debunk the best six months by going back to eighteen ninety six when the Dow started. And, you know, it didn’t work back then, but back then
Barry Ritholtz: People really didn’t go on summer vacation. There weren’t a lot of sleepaway camps back then.
Jeff Hirsch: No. And, You know, it was a farming agrarian society where That was work time. Where it would pretty much bind me in the first half of the last century, the twentieth century, where money would come in To the agriculture, they’d be buying a fuel, seed, you know, fertilizer, equipment, and they also were borrowing money. And then when the loans came due at harvest time is when the market would roll over in September.
Barry Ritholtz: So This is the inverse of that. So What’s the worst month of the year for stocks?
Jeff Hirsch: Uh, August or September depending upon if you go back to 1950 or 87 post Crash. So I mean and they delivered this year back to back. Uh, That was the low. August, September was the low this year, and and we had an amazing November following that. October was pretty good. November was fire
Jeff Hirsch: October was the turn. October was the turn, which is I mean, there’s a picture From the sixty nine Almanac, which shows that, you know, October, bear killer, bargain month, the best time to buy stocks, especially small and tech stocks.
Barry Ritholtz: What are the best months for the year?
Jeff Hirsch: Uh, November, December, January are the three best consecutive months. Uh, we’ve seen, you know, October get better on the turnaround, but, basically, November, December are the best. January has got a little bit weaker with profit taking that seems to happen in the new year these days.
Barry Ritholtz: Last question. We’re coming up on the fourth year of a presidential term. It’s an election year in twenty twenty four. What does seasonality tell us about presidential election years?
Jeff Hirsch: Well, I mean, we have a sitting president running for reelection, and our research shows that you know, as we all know, the market hates uncertainty. So with The same person in office who’s running again whether whatever the polls say is is is is one thing, but the fact that the potentiality of the same policies, The same economic, civic, and, you know, uh, market-oriented, uh, policies are gonna be in play or at least the same mentality.
The power of a sitting president is really undeniable.
Years when you have a sitting president running for reelection, the Dow is up, uh, yes, excuse me, S and P is up twelve point six percent, Twelve point eight percent. Excuse me. And when there’s an open field, it’s minus one and a half percent. That’s very interesting. For us,
Barry Ritholtz: You think it’s bullish having a president run for reelection even if it’s against a prior president?
Jeff Hirsch: There’s not a whole lot of, uh, data points for the hundreds? You gotta go back a century and change it? Was it one? Amazing. That’s not a pattern. But anyway, We’re bullish for twenty twenty four.
Barry Ritholtz: It’s necessary to notice that whereas these seasonal tendencies have been noticed traditionally, they’re definitely not ensures of future efficiency. Markets are influenced by a big selection of things, and previous patterns don’t all the time predict future outcomes. Markets might have turn out to be extra environment friendly than ever between algorithmic buying and selling and AI. Perhaps that would have an effect on seasonal tendencies.
Regardless, Traders ought to pay attention to seasonality and what it would imply together with all these different components for his or her complete funding technique.
I’m Barry Ritholtz. You’re listening to Bloomberg Radio’s On the Cash.