Liz Looks at: Seasonality into Fall

Different Drum

The summer months are coming to a close, which means we are about to start my favorite season… football. I mean fall. No, I mean football. Go Packers!

Markets, however, don’t tend to like fall as much because it marches to the beat of a different drum. Seasonality gets a lot of talk time across financial media, so we thought it would be a good refresher to find out why that heats up during this time of year.

To add fuel to the fire, since this is also an election year, there’s another layer of seasonality at play as November 5 draws nearer. Nerves are on high alert and knee-jerk reactions could be more common.

Why? For starters, the summer vacation cycle ends and people go back to their desks to trade stocks again. In fact, September is the second highest month for trading volume of the whole year (February is the first). The S&P 500 average monthly trading volume for June through August is 15.2 billion shares, and it jumps up to 17.2 billion in September.

More trading activity can lead to more volatility. Part of it is caused by repositioning after the action of the summer months, which tends to be quite positive. Other parts are caused by different factors each year, but the simple fact that more people are active in the market makes things a bit more jumpy. September is consistently an exciting month… depending on your definition of exciting.

It’s easy to see that September takes the cake for the worst month on average. That doesn’t mean it has to be that way, but it’s worth noting, especially after what’s looking to be a strong finish to August.

But I started this column by talking about all of fall, not just September. The average monthly returns for October and November tend to look much more promising, leading one to believe they’re less volatile. Not so fast. Volatility gets measured on the upside and the downside, and the months of September, October, and November have some of the highest number of days with +/-2% swings. It’s just that September’s downward swings tend to outweigh the upward swings by a wide margin.

Remember when we hadn’t had a 2% down day in the S&P for 356 days? If the chart above holds, we could be in store for more 2% market moves in three months than we’ve had in about 17 months. This, on top of the election in early November, is shaping up to be a movie you don’t want to miss.

Signed, Sealed, Delivered

At some point in early November (hopefully), the election results will be known and markets can adjust and react accordingly. The lead-up to that time can be underwhelming in markets, but typically there is a relief rally on the other side.

That’s not much different from non-election years, except for the exact timing. In non-election years, the toughest period for the market tends to be in late September, while during election years that gets pushed out to mid-October. In either case, if we follow the typical pattern of an election year, volatility could be somewhat heightened until after we know the election results.

The forces of seasonality are looked at by some as having low predictive power. On some level, I would agree with this since the forces that drive markets are different every year and the environments that surround us each season are also different. However, this year is in the unique position of having multiple forces line up to make fall an interesting period. Many of the forces could be positive for the economy and markets, but many of them could also present unwelcome surprises or curve balls. If there is one big risk I’d watch out for this fall, it’s complacency.

Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
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