Seasonal Variations

03/08/2012 at 4:35 pm 3 comments

We recently looked at the old adage “sell in May“, wondering whether it would prove as valuable a tip for stock market behaviour as it would have done last year – and (almost, but not quite) in 2010 too. Since then of course, while an investor who sold on May Day itself would still be just about on the right side of the trade, the FTSE 100 index – which averaged about 5,460 over May as a whole – has recovered, and at the time of writing is roughly 5% higher than that.

In reality, “sell in May” – like the January effect, and others – is one of those calendar-based phenomena that don’t really exist. Or being kinder: is an effect which did once exist (perhaps) but has since become less reliable as markets have tended towards greater efficiency over time.

A similar-yet-different seasonal effect is the summer lull. As we described it two years ago, this is the period roughly between Wimbledon and the end of the school holidays when “senior market participants are hosted at a series of high profile sporting events before being flown off to their holiday homes and luxury hotels. Their deserted offices are not supposed to witness much in the way of interesting activity during the period.”

London is in the middle of the highest profile event of them all of course, so it is appropriate that the summer lull seems to be making a comeback.

Sticking with the UK index as an example, the FTSE 100 floated a stately 1.2% higher this July, its smallest percentage movement for the month since 2004. Over the last few years the summer months have been positively volatile: 2008 was marked by darkening gloom as the credit crunch became an international recession, 2009 saw a powerful relief rally, 2010 a significant rebound from the world’s first shock over the situation in Greece, and last year a flash crash from which the recovery remains only partial.

Perhaps the Olympics will combine with the usual features of the summer break to give markets a respite this year. Such an outcome would certainly be welcome to many.

There is, however, a lot of summer left to go. While real catastrophe continues to elude us – waiting in the wings, to take the bearish view – developed world growth remains sub-trend at best, reported earnings and other indicators suggest a period of broadly flat economic activity and there is always some European statement / election / decision / downgrade waiting to terrify everybody.

It’s a rum time for finance when boredom looks attractive. But with one alternative prospect being calamity, that’s the way things are.

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