Seasonal Effects in Stock MarketsUpdated: Dec 2, 2016
Santa Claus affects the stock markets prices? Read how seasons of the year may influence the stock markets.
SEASONAL EFFECTS IN STOCK MARKETS
Prices in stock markets around the world are mostly driven by rapid changes in relevant information. But certain seasonal and calendar-related trends, and trends that have very little to do with the stocks themselves or economic conditions also influence the prices. The trends are well-known and are anticipated by most investors, so it is debatable how great an effect they really have; however, there are still ways a smart investor can take advantage of them.
From a research and analysis point of view, understanding seasonal effects is important because they often explain changes in the markets that are not attributable to prevailing economic or business circumstances, and as such become a significant variable.
The January Effect, the December Effect, and Santa Claus Rallies
These three phenomena are closely related.
The first to occur is the December Effect, which usually happens during the weeks immediately before and after Christmas, in which markets will decline. The reason for this is that many traders will sell off shares just before the end of the year, in order to claim a capital loss for the year and reduce their taxes.
The January Effect is a market rally in the first week of January when the shares sold at the end of the year are repurchased. The effect is significant:
According to investment advisors, Ibbotson Associates, since 1924 the average monthly returns for stocks in the S & P 500 have been approximately half a percent higher in January than in the other 11 months of the year.
Sometimes, particularly in years when the December Effect is especially strong or happens a bit earlier in the month of December (typically in years when Christmas Day falls in the middle of the week), the markets will experience a “Santa Claus Rally”. This is a bit of a recovery, though usually not as strong as the January Effect, thanks to share buying by bargain hunters.
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The September Effect
In the US markets, September is historically a low point during the year.
Since 1926, the monthly average return for the S & P 500 has been positive for every month except September, even taking into account huge declines in the stock market in 1929, 1987, and 2008.
The September Effect is largely an American phenomenon; it does appear in markets outside the US, most often when the September drop in the US markets is especially strong, but not as consistently.
The usual explanation for the September Effect is the end of summer, which is traditionally marked by the Labor Day holiday on the first Monday in September in the US. Consumer spending tends to decline in September, and the month is the beginning of the third quarter, historically the weakest period economically in the year. Markets rise again after September, as businesses and consumers begin to prepare for the holiday season in the last two months of the year.
Turn of the Month
Since at least the 1880s, and possibly earlier, the cycle in stock markets all over the world has been one in which the markets are highest in the few days at the beginning and end of the month, and lowest in the middle of the month. In the modern era, the effect is attributed to the behavior of mutual funds, a large proportion of which serve as investments for retirement funds.
Money is usually directed into mutual funds at or shortly before the end of the month, increasing share purchases across the entire market for a brief period of time – usually six to eight days overlapping the end of one month and start of the next. The effect, however, has existed for much longer than mutual funds have, and so the explanation for it is incomplete. Some researchers have speculated that it is largely a psychological effect; people tend to be more optimistic and active at the beginning or end of a month, and more inclined to spend money.
Turn of the Quarter
Just as the beginning and end of the month tend to be more active periods in the stock market, the market at the end of the quarter usually advances as well. This is a more modern effect, and can usually be attributed to an activity derisively called “window dressing”: Fund managers who report their activities in detail on a quarterly basis will often purchase stocks that have performed well during the quarter in order to make their portfolios more attractive. Because window-dressing involves stocks that are generally already comparatively high-priced, the activity can have a big effect on the entire index.
Prices changes in stocks in short periods – hours or days – move up or down in a logarithmic rather than a linear trajectory, so prices change upward when there is a significant amount of window-dressing taking place actually accelerate. Window-dressing is not illegal, but is generally regarded as unethical; many trustworthy fund managers do not engage in the practice, but enough others do that it has a noticeable impact on the market.
The first day of the work week traditionally is the worst day of the week for stock markets.
Since 1885, the average daily return in the US markets has fluctuated between 0.4% and 0.8% during the Tuesday-to-Friday part of the week.
The average daily return for Mondays, however, is actually a loss of about 1%.
The effect is partly psychological; most people are apparently not enthusiastic about "getting back to the daily grind" after the weekend.
There is also an identifiable cause in the reporting habits of companies, one which can be attributed, oddly enough, to a trend started by Adolf Hitler. Brutal megalomaniac though he was, Hitler was capable of being clever at times; in the last few years before the outbreak of World War II, he developed the habit of making his most provocative political moves over the weekend – a time he knew that politicians in France, England, and Russia were likely to be enjoying their days off in the countryside, unable to assemble and react quickly to whatever rotten stunt he was pulling.
These days companies that have particularly bad news to report, items such as large financial losses, unexpected changes in key personnel, or other things that would surely have a negative impact on their share prices, tend to release the information over the weekend.
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