Stock Market Seasonals: Time to Sell or Buy?

Rusty Vanneman, CFA/CMT/CIO, CLS Investments

Many investors believe the next few months are the scariest time of year to be an investor, and some think it’s a time to get out of the market completely. While the first few months of autumn have historically been challenging; for long-term investors, it’s a great time to buy.

One of the most popular questions from investors is: “When is a good time to invest?”

The best answer is always this: If you have money to invest, you should invest immediately. Each day, the market has a positive expected return. Most days are higher rather than lower, and stocks are almost always more likely than not to beat cash and bonds. These probabilities and expected returns only improve in favor of the stock market every day the time horizon is stretched out.

But we’re all human. If we buy right before the stock market falters, it’s inevitable we will feel regret and wish we had bought later.

The second-best answer to this common question, however, helps solve this problem: Systematically spread purchases out over time. This could be done in different ways, but the key is to determine the plan in advance and execute it exactly as such. One common method, for example, is to invest one-third immediately, another third exactly a month later, and the last third another month after that. It’s a disciplined approach that takes the emotion out of deciding when to invest. Plan your work and work your plan. While the expected return of this disciplined approach usually has a lower return than investing all at once, it is much more palatable to most investors. In fact, this approach is undoubtedly effective in getting investors into the market. Bottom line: It works.

Nonetheless, many investors still try to time their market moves based on short-term outlooks. Forecasting the markets is extraordinarily difficult, of course, but there is arguably a time of year when the odds suggest one could get a bit cleverer regarding investment timing. And we are about to enter that time of year, which appears to offer an excellent buying opportunity for investors.

The next few months are likely to generate below-average returns, which suggests we could see stock prices on sale. Not only does that indicate a potential value, but it sets the stage for above-average returns in the months that follow. There are three reasons.

First, many measures of investor sentiment are currently elevated (at least at the time of this writing). High bullish enthusiasm typically suggests expectations are also high and potential fresh buying power is lessened, if not potentially exhausted. In other words, without new buying power, it’s easier for market participants to get disappointed and for the market to reverse. Many studies have shown that when most investors are bullish, the stock market tends to generate below-average returns in the months that follow.

Second, the mid-term elections are November 6. While investing on political views is typically a fool’s game, it is generally a good bet to expect heightened volatility and below-average returns before an election and higher returns after the election. The political uncertainty and incessant negative campaigning before elections tend to negatively impact investor mood. But that typically clears up shortly after, regardless of which party wins (current odds suggest the Democrats will win the U.S. House).

Third, and perhaps more important, is the seasonal tendency of the stock market to generate low returns during its two weakest months of the year: September and October. Whether one is looking at data over the last 35 years, the last 65 years, or going back to 1900, September and October rank last and second-to-last in returns (data source: Ned Davis Research).

But once the market gets into November, the gains rebound sharply. This time of year is typically the best three-month stretch for the market in all three aforementioned time frames.

So, if you have cash you want to invest, and it’s still not invested by early November (or post-election), odds are your investment portfolio will likely be suboptimal in terms of future return potential. Of course, there are exceptions (late 2008 is one very notable example). But investing is often an odds game, and the odds suggest you should be fully invested according to your appropriate portfolio risk level in November.

If this scenario holds to form though, and the market is weaker the next few months, consider how difficult it will be for many investors to pull the trigger. If the market is weak, for instance, general market commentary will not be positive, and it will be uncomfortable for many to invest “until the coast is clear”. Thus, it’s good to have a plan to get into the market — and execute it. Invest some now, but make sure you’re appropriately invested in a few months. If the market is indeed soft, it’s a buying opportunity. Take advantage of it!

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed here and should understand that statements regarding fu¬ture prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any unsystematic risks associated with particular investment styles or strategies. The S&P 500 Index is an unmanaged index of 500-large capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general. You cannot invest directly in an index