Seasonality Update: What Doesn’t Go Down Must Go Up

By Callum Thomas

[biiwii comment: it is a pleasure to welcome Callum to the exclusive list of contributors!]

As I write this article the S&P500 is up 1.4% month to date, with a max drawdown of -0.6% – which makes for a relatively joyful experience in September despite the previously mentioned sinister seasonality that typifies the historical averages for that month.  Hence the weird title “what doesn’t go down must go up” – and while seasonality didn’t “work” in September, it’s worth highlighting that the final months of the year are typified by positive seasonality *on average*.  If you’re happy with that then stop reading, and if you’re waiting for the ‘but’ then proceed to the next paragraph.

October, as the sinister seasonality statistics article showed in the table, while on average seeing positive returns also has the honor of having the highest best and the lowest worst return on record, and saw the largest standard deviation.  In other words, historically October can be a wildcard month.  This becomes interesting when you think about the wrangling for reforms in American politics (healthcare, tax cuts/reforms), the likelihood of more North Korea escalation, and the launch of Quantitative Tightening.

On that last note I turn the attention to the second chart, which shows that the historical pattern is the US dollar gets its second wind about this time of the year. This only adds to an interesting mix of moving parts as many asset classes are moving through important transition points.  So, asset alligators beware for scares as the 31st of October approaches….

This chart shows the S&P500 through 2017 YTD against the average seasonal pattern including and excluding the financial crisis, across the year 1990-2016.  It seems to be walking a familiar path.

Comparing the average seasonal tendency of the US Dollar Index and the S&P500, there’s an interesting pattern where both assets get their second wind around this time of the year…

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