When is the most wonderful time of the year to buy stocks?

When is the most wonderful time of the year to buy stocks?

When is the most wonderful time of the year to buy stocks?

Given the range of mantras and general rules on market timing — “sell in May and go away,” the “January effect,” the “Santa Claus rally” — investors may be forgiven for being confused or hesitant on when they should be optimistic. Still, could there be a simple seasonal trend for them to track?

By examining money flows among different categories of mutual funds, US and Canadian researchers have found that investors generally prefer risky assets in spring and safer ones in autumn, reported BBC News. This could also spill over to financial media: using a text-mining to evaluate the mood of articles published from 1986 to 2010, Japanese researchers concluded that there is increased optimism in the first half of the calendar year, which yields to pessimism in the second half.

Some economists argue that the seasonality is driven by seasonal conditions throughout the year — temperatures, day length, sunlight levels — because they can sway investor behaviour. Among that group is Lisa Kramer, a finance professor at the University of Toronto, who argues that seasonal affective disorder (SAD) during long, cold, and dark winters can make people less optimistic about investing.

“People are not often aware that their mood can play into this, but the evidence is pouring in,” she told BBC News.

In an earlier study, the US and Canadian researchers behind the research on mutual-fund flows found a link between SAD and seasonal preferences for different investment types. Based on a comparison of seasonal daylight fluctuations with stock market index data, they found a so-called “SAD effect”: returns tended to be lowest in September, after which they rise through autumn and peak just after the winter solstice in late December, then fall again and flatten out over spring and summer. Tellingly, the results from countries in the southern hemisphere (Australia, New Zealand, and South Africa) were six months out of phase with the northern hemisphere.

According to the researchers, the higher overall returns in winter can be explained by price fluctuations in quality investments. When cautious investors sell their riskier assets, those who are more adventurous can scoop them up for a bargain price. That lays the groundwork for disproportionately high returns at the end of winter, when the market eventually bounces back.

Despite the evidence for seasonality, there are some caveats. Other seasonal trends such as the January effect, the holiday effect, and the turn-of-the-month effect could also affect stock prices, particularly for small-cap stocks. And while there’s empirical evidence for a seasonal effect, SAD doesn’t explain all of it. Mark Ma, a professor of accounting at American University in Washington, DC, noted the case of “Singapore, where the weather is the same almost all year – around 32 degrees Celsius – but they still found this effect.”

Ma and other experts agreed that while it’s good to be mindful of seasonality, it’s better to pay attention to concrete indicators like a company’s growth potential or its profitability over the past year. And the true best way, they said, was to take less risk over the long haul.

“[P]eople don’t make rational decisions at a time when it comes to money,” said Haran Segram, a clinical assistant professor of finance at New York University. “I tell my students, it’s a patience game.”

 

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