In late July Bespoke Investment Group posted a table of average returns for the Dow Jones Industrial Average for each of the 12 months of the year*. Over the last 20 years, August has been down 45% of the time an average of 1.30% and September has been down 50% of the time with an average decline of 0.70%. The month of October, when all bad things happen, is actually up 75% of the time with an average gain of 2.13%.
The refrain that so goes January, so goes the rest of the year also seems to fail as January has been down 55% of time in the last 20 years compared to just a handful of full year-long declines.
If the “worst” months of the year are only down about half the time, then any belief or desire to shift the portfolio based on the calendar is nothing more than a guess. No one can know what the market will do. History can be something of a guide but tendencies are far from infallible, forward looking guarantees. While an advisor will realize this, clients may not which creates an opportunity to retell whatever message the advisor believes in telling clients.
The bigger point to be taken from these sorts of numbers is that seasonality is more along the lines of being noise, noise that can distract advisory clients and pose challenges to the disciplined approach, tailored to their specific situation that their advisor created for them.
Even if a client doesn’t realize it or remember it, a big part of the service they paying their advisor for is to help them avoid financially self-destructive behaviors like believing the portfolio should be traded based on the history of one month having a slight tendency to decline or wanting to sell on a day like August 24th, 2015 or sell on Brexit Thursday or put far too much into a lottery ticket-biotech stock and so on.
Another big part of how advisors help clients is recognizing what isn’t noise, some events or shifts in the market are indeed important. The job of being an advisor of course includes constructing a portfolio that provides both the opportunity to meet financial goals but with some form of ballast for equity volatility. Historically of course this is the role that fixed income has played in a diversified portfolio. One of the themes for 2016 has been that investors have been buying stocks for yield and fixed income for capital gains as bond yields have continued to trend lower. This potentially represents one of those important shifts in the market and while capital gain potential from fixed income markets has been a theme for 2016, this has been unfolding over the course of the entire recovery from the crisis low in 2008 with visibility for this to continue for the foreseeable future.
If fixed income can provide capital gains, then it can also provide capital losses and perhaps take on a different volatility profile than what investors have been historically accustomed to. This is potentially an important piece of information (I would argue it is unquestionably important) and will dictate how successful advisors construct client portfolios.
Another big noisy event going on right now is the buildup to the 2016 Presidential Election. If someone spends enough time they will find data to support whatever political conclusion they wish to draw but again it is just noise. Of course many clients will be vulnerable to some form of noise or distraction or other irrational/emotional response.
Whatever noise the clients might be asking about today, Presidential election or something else, will of course subside because at some point clients realize today’s noise for what it is but in a few months something else will come along to engender irrational fear all over again.
* Bespoke Investment Group report “August Seasonality” 7/29/16