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Seasonal Opportunities: Prepare for Three Strong Months

Seasonal Opportunities: As you prepare for three months of potential growth in the stock market, it’s essential to explore various investment strategies. These seasonal opportunities can lead to significant gains if approached wisely. Keep an eye on market trends and make informed decisions to maximize your returns.

September was a month to forget, particularly if you were a short seller. If August seemed challenging for large-cap stocks, September proved to be even more sluggish. The question on investors’ minds now is whether this sluggishness is a prelude to a turbulent fourth quarter.

While recent events may make traders apprehensive about consecutive underperforming months, historical data doesn’t necessarily support this concern. So, as we bid farewell to a lackluster August and a subdued September, let’s take a calm and informed look at what October has in store.

A Year in Review: 2023 According to Plan

In the realm of financial markets, seasonality involves the study of expected asset-path patterns based on historical tendencies. For instance, data spanning from 1950 to 2022 indicates that the S&P 500 typically experiences a flat or slightly negative performance in August, followed by a notably negative performance in September.

Interestingly, this pattern played out in 2023. The S&P 500 has demonstrated remarkable consistency in following seasonal trends so far this year. January was robust, February saw a dip, and March through April exhibited bullish trends for large-cap stocks, aligning with seasonality expectations.

Following the age-old adage, “Sell in May and go away, and don’t come back ’til Halloween day,” the summer months, marked by lower stock-trading volumes and increased volatility, were generally positive but occasionally tumultuous this year. However, August and September proved to be months best observed from the sidelines.

Unsurprisingly, some sectors fared better than others. In September, the S&P 500 declined by 4.7%, while the tech-heavy NASDAQ saw a 5.1% drop, and the small-cap Russell 2000 index retreated by 5.9%. Among S&P 500 subsectors, real estate performed the worst, sliding 7.2% into negative territory for the month, with only oil/energy-sector investors escaping the September downturn.

Demystifying October’s Reputation

As we step into October, a month known for ghost stories, pranks, and occasional stock-market turmoil, it’s essential to consider the historical context. October has witnessed severe corrections in the large-cap stock market in 1929, 1987, and 2008.

However, it’s important not to overemphasize the significance of occasional October downturns in the long term. From 1928 through 2022, the S&P 500 has, on average, gained 0.6% in October. While not an outstanding performance, it is far less ominous than some might expect.

So, the notion of “don’t come back ’til Halloween day” might not hold as much sway as it once did. Unless there is a looming negative surprise in October, such as a government shutdown, an unexpected oil price spike, or another unforeseen black swan event, historical seasonality suggests that staying the course through the month is a reasonable strategy.

Furthermore, if one were to select three consecutive months for seasonal strength, October through December would be a prime choice (although November through January also holds promise). While historical trends should not be the sole guide for investment decisions, if the seasonality patterns persist in 2023, the S&P 500 could experience a robust fourth-quarter recovery.

Autumn Assurance: Seasonal Trends and Sensible Investment

Investors should not let the study of seasonal trends trigger unnecessary autumnal anxiety. Some may argue that the third year of the four-year presidential cycle is historically the strongest, adding another layer to the seasonality analysis.

Alternatively, you can take a more relaxed approach and acknowledge the purpose and limitations of seasonal patterns in financial markets. Seasonal patterns represent averages and may not apply to the current situation. Strong Februaries and Septembers have occurred, defying seasonal expectations.

Additionally, even if large-cap stocks have adhered to historical trends this year, it doesn’t guarantee that they will continue to do so in the final months of 2023. Recency bias can lead traders to perceive patterns that may not exist and make hasty conclusions.

However, there is no harm in monitoring seasonal patterns for the sake of curiosity and as one of the tools for forward-thinking stock traders. Nonetheless, it’s important to remember that the study of seasons should complement, not replace, logical and rational decision-making in the world of finance.

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