Seasonal Swoon? That’s Not Our Tune!

Oak Harvest takes a look at seasonality in the capital markets, why many analysts are predicting an imminent downturn, and why we believe their analysis flawed! Join us for this edition of Stock Talk!

Chris Perras: Hey, good afternoon. Happy Friday. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. We’re an investment management and financial advisor here in Houston, Texas and welcome to our August 6th Stock Talk podcast: Keeping you connected to your money. Despite all the negative TV commentator comments and bearish newsletter writings telling us of the coming confiscation of your cash and retirement accounts or the coming seasonal sell-off, the S&P 500 continues to make all-time highs. The latest fear-mongering on TV and in newsletters by many is, well that’s the coming August through October seasonal swoon. The title of this podcast, August Through October, Seasonal Swoon? That’s Not Our Tune.

Our investment team keeps hearing bearish calls on the market due to it being overvalued. We remind our readers and listeners that valuation is a horrible timing tool over weeks, months, quarters and years in many cases. We also remind listeners that most of these strategists have been parroting the same lines for the last 12 months and have been wrong.

Over the past two to three weeks, I’ve counted no less than 20 strategists’ calls calling for a coming seasonal swoon. By swoon I’m talking predictions of 8%, 10%, 15%, even 20% down moves in the S&P 500 and the broad indexes. It seems to be the latest market timing call du jour. Merrill Lynch, PNC Bank, and someone at Scandinavia Bank were just on TV recently calling for such a move, lower, all different percentages. No disrespect meant to the Scandinavian Bank, but really, this is a news story? Some obscure European bank projecting is newsworthy?

PNC bank, this is almost newsworthy because some of us have heard of this regional bank, but then you read the story and this individual has been clearly wrong all year recommending emerging market stocks over the US S&P 500. Now they’re saying the S&P 500 will decline and emerging market stocks will go up. I’m sorry, but that’s not how markets work most of the time. The strong stay strong during a year. Almost never do markets change 180 degrees mid-year.

I’m going to present you with the data and conclusions that most of these strategists are quoting and then I’m going to do my own as best to refute these claims and ideas with data that the Oak Harvest Investment management team thinks really matters. Here’s the historic data according to Merrill Lynch. The time period from August through October is the seasonally weakest three-month period of the year. Okay, that makes sense. We are 75% a consumer and service-driven economy and the third quarter is usually slow. X back to school in anticipation of the fourth quarter holiday time period and next year’s first quarter as consumers spend for the seasonally strong fourth and first quarter.

According to Merrill Lynch, monthly S&P seasonality suggests that August is a transition month between the strongest month of the year, which was July, and the weakest month of the year of September. The S&P 500 was up 59% of the time in July, with the average return being 1.6%. Just this past July, the market was up 2.27%, so this has been slightly better than the normal time period. September is the only month of the year in which the S&P 500 has been up less than half of the time going all the way back to 1928. Going all the way back to that date, the S&P 500 is up only 45% of the time in September with an average return of -1%. If you look at all that data, that’s pretty bad odds and a pretty bad return for the month.

Additionally, we’ve repeatedly pointed out since mid-last year that 2021 is the first year of a presidential cycle. Well, here’s some data from first year presidential cycle. The three-month seasonality shows that March through May, and April through June and May through July are the best three-month periods of the year during the first year of a presidential cycle.

Merrill Lynch points out that seasonality then becomes less constructive after that with August through October and September through November being the two weakest three-month periods of the year. Okay. They go on to repeat that this suggests the risk of a late summer into fall correction during the presidential cycle years like this one in 2021. Sounds reasonable.

Finally, they point out that monthly seasonality of upward moves in the VIX, the volatility index that most people quote on TV, going back to 1992 shows that the higher average spikes of volatility in August, September, and October. They state, “This corroborates the more challenging S&P 500 seasonality backdrop for August through October, for all years and the presidential cycle year one.”

Now I will tell you, I absolutely love this strategist at Merrill Lynch. He does amazing things and amazing work. I’m usually in agreement with him, couple that with the Chartis work of Larry Williams and Tom Demark, which were highlighted by Jim Cramer and CNBC about a week ago. After seeing all these things, I was initially very worried about the same things these 20 or so strategists have been pointing out. I was really worried at first.

Well, neither of these individuals were throwing around numbers like -10% or -15%. They were projecting downside moves. The average strategist out there keeps talking about the average peak to trough down move in a year being in the negative low teens, even in good years in bull markets. That’s pretty bad. I was worried until I sat and I thought about their work for a few minutes. Then I was worried until I spent a few hours last weekend researching the phenomenon myself. Well, and after geeking out for three or four hours on my Bloomberg on Sunday and the internet doing my own research, what did I find? Well, here it is. It’s encompassed in the podcast titled, Seasonal Swoon? That’s Not Our Tune. Here it goes.

Data scientists will tell you that more data is always better. Always. In this case I believe they’re flat out wrong. First off, any set of data we use with less than hundreds of data points is an exact at best. I ask you first, why are they using data all the way back to 1929, 1928 in the case of seasonality, and presidential elections, first terms, and why are they using data back to the early 1990s when researching VIX spikes seasonality? Yes, that gives you more data, but is it relevant data?

My argument is people are using way too much data looking for historic analogies. The number one reason I believe that these prior timeframes encompass almost irrelevant data is primarily one reason only. The Federal Reserve and its QE policies did not exist before 2008 and 2009. So why in the world are we using data back before then for this cycle and comparing all this data?

I’ve argued and shown by way of data that this recovery has mirrored more recent time periods that current investors are attuned to. That time period, the post financial crisis period of 2008, 2009 through current times. If we continue our data analysis to what I believe is a more important and accurate data set, that 2009 through current period, what does one find with regards to upcoming seasonal weakness from August through October?

What you find is most of these strategists are fear-mongering. Why do I say this? Because the data says so. First off, there have been three first-year presidential terms since the great financial crisis. Those were 2009, 2013, and 2017. That’s two under President Obama and 100 President Trump. Well, obviously, these administrations have 180 degree different economic and fiscal policies. However, they did have one thing in common. They both had the Federal Reserve providing varying degrees of QE and monetary easing.

What happened during those three three-month summer periods from August to October in 2009, 2013 and 2017 that these strategists many of which chartists are warning about? Well, here’s what I believe is the relevant data. Remember, there are only nine months in this dataset. However, there were only two down months out of those supposedly fear-based nine during those presidential years, much like the one we’re in right now in 2021.

Yes, two down months out of nine during August through October in 2009, 2013, and 2017. You’re thinking, “You’re kidding, right?” Nope. Well, you must be thinking to yourself, “Yes, so there were only two down months, but given those dire warnings on TV, I’m sure the market cratered those two months, -10%, -15%, -20%. Given all those warnings I’m hearing, I want to get out.” Well, the answer is no, the two down months out of the nine were October of 2009, which was down just under 2%, and the month of August, 2013 which was down just over 3%. 2017. the last of the first year presidential term elections, this cycle had no down months during August through October. None, zero, zip, nada. Guess what, listeners, in each of those years 2009, 2013, 2017 the lone down month during the August through October period was the only down month in the markets for the remainder of the year. That was it. You got one dip and that was it.

You got one minor dip ans the market ripped in all three years.

Obviously past performance is not a guarantee of the future. That’s pretty interesting data. To put this in perspective, should we begin and behave in similar manners over the next three months? The big swoon that most people are calling for should confine itself to around -3% putting the S&P 500 back around 4,300.We’re a level we were at about three weeks ago.

But Chris, you’re leaving out that rampant increase in volatility that comes in August through October that most of these strategists are pointing to. Yes, sure we didn’t drop much in those months but I’m sure the markets were wildly volatile throughout those periods, you’re thinking. The answer once again is no. Long time listeners will recall our podcasts on volatility in the markets, what it really means, what is meaningful and what is predictable.

These strategists are, in my opinion, once again focusing on the wrong thing. They’re focusing on spot volatility or the spot VIX which is almost always the volatility quoted on TV which we’ve talked in the past is virtually meaningless, it’s noise. It’s not in an investor’s time horizon. Time and time again I’ll repeat myself until my listeners understand, this index is not predictive.

What is predictive for investing purposes is the level and trend in future implied volatility months out. During the time periods of 2009, 2013, and 2017, what you see is that out of those combined nine months, that everyone’s worried about from August through October in those years, only in three of those months did future and applied volatility rise. Guess what? All of those months were August. August of 2009, August of 2013, and August of 2017 future volatility rose.

Oh my gosh. Let’s run for the covers. Let’s get out of the market. No. The bigger question is what happened to those markets in those months? You might guess the market’s dropped a tremendous amount in each one of those months. Your guess would be wrong. In August of 2009 the S&P 500 rose almost 3.5%. In August of 2013 it fell a little over 3%. In August of 2017 it was essentially flat. Each August had higher volatility but only one of them had a negative monthly return, hardly something to fear, hardly something to try to get out of the markets for.

In the end here’s what the investment team at Oak Harvest thinks and here’s where we stand. As far as we are concerned, bears and strategists calls for -10%, -15%, or even -20% corrections continue to be grasping at straws. Those calling for a seasonal swoon, most of whom have been wrong for the last 12 to 15 months in calling this recovery, are likely to continue to be wrong again. It’s summer, and as far as the team at Oak Harvest is concerned, it’s been a very normal one at that.

What we do see tactically for this August through October timeframe is we continue to see fear-mongering done largely for those who’ve been wrongly calling the recovery the last 12 to 15 months. We see what could be maybe a 2.5% to 4% pullback in the market at any time is possible peak to trough if you’re perfect but this kind of move is almost impossible to time in a way making it a tactical trade, very impossible to add value to a portfolio. Those strategists on TV now seem to be parroting a theme of a slowing economy caused by the COVID Delta variant. They now are downplaying the recovery just at a time when the economic data usually starts surprising to the upside in mid to late August and September.

At Oak Harvest we’re a comprehensive wealth management and financial planning advisor located right here in Houston, Texas. Give us a call to speak to an advisor and let us help you craft a financial plan that is independent of the volatility of the stock markets. Our phone number here 281-822-1350. We’re here to help you on your financials journey into and through your retirement years with a customized retirement planning. I’m Chris Perras, have a great weekend and God bless.

Speaker 2: All content contained within Oak Harvest podcasts expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any sited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities.

Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future result.