Most investors know about the seasonal bias to the UK stock market. Shares typically tally the biggest chunk of their yearly gain in November to April.
Some even alter the timing of their investment capital tops ups and draw downs to exploit these seasonal differences.
This strategy definitely paid off in the 1980s and 1990s. The stock market rose in 19 out of 20 years from November to April during these two decades. Shares gained, on average, a whopping 12.5 per cent per year. In contrast, prices rose in just 10 of 20 times during the other half of the year, May to October, with an average annual gain of just 1.5 per cent.
Unfortunately, no profit trend runs forever in the world of investing. History is littered with great ideas that suddenly stopped working. Remember the Nifty Fifty of the 1970s.
These were institutional darlings that could not possibly fall…but eventually did. More recently, momentum players laughed at those unwilling to chase high prices even higher during the late-1990s Tech Bubble. Those laughs eventually turned to tears.
Will the performance disparity between November to April and the rest of the year suffer a similar fate? No one can say with certainty but history provides several useful perspectives worth thinking about.
Most glaring of all is that the extreme profitability of November to April (when compared to the rest of the year) is a recent phenomenon. From 1920 to 1970, these six Winter-Spring months delivered a much smaller advantage. Shares rose 65 per cent of the time in the six good months with an average gain of 3.9 per cent per year.
In contrast, prices rose in May to October 58 per cent of the time and delivered an average annual gain of 2.3 per cent.
For the most part, private investors were unable to capitalise on this profit gap. The performance differences between strong and weak months were too small and too many years turned out to be exceptions to the rule. In those days, seasonal investing was part of a group of interesting trends that were statistically significant but too small or too sporadic to be taken advantage of.
Another example from this group of unactionable trends is the tendency for shares to rise 52 per cent of the time over the long run on any given weekday. However, Wednesdays rise 54 per cent of the time, slightly more often than the other four days. This is a real historical fact but the differences are too small to aide anyone trying to devise a Wednesday-linked trading strategy.
Going back to November-April, the trend began to "hot up" during the 1970s. Shares gained an average of 16.5 per cent in November to April from 1971 to 1980 versus a loss of -2.5 per cent in the average year from May to October.
But once again, a peek below the top line figures revealed an unusable trading trend. The big seasonal differences of this decade were due to wild mid-decade price swings occurring during an atypical period of stagflation and political instability.
Shares collapsed by 38 per cent from May to October 1974 and then rocketed up by 77 per cent in the next six months. A similar wild reversal occurred two years later from May 1976 to April 1977. These frantic one-in-lifetime fluctuations account for all of the performance differences of that decade.
The trend finally began to deliver the goods to the average private investors during the final two decades of the century. Prices rose in 19 out of 20 years from November to April versus just 10 gains and 10 drops in the other half of the year.
It was near the end of this period that analysts began to call the seasonal profit bias to the attention of investors. In retrospect, it appears that publicizing the trend helped helped to destroy its usefulness. Stock market profitability is now shows signs of returning to its historical roots.
Both halves of the year have risen in four out of the last six tries and fallen twice. The average annual gain since the start of the new century is 3.3 per cent in the good half of the year versus a loss of -1.7 per cent in the weak half. The gap between the two halves of the year has narrowed.
What is causing this reversal? No one knows with certainty but the most likely reason is the old stock market saw that success breeds failure in the world of investing. Think of it like this. If you were planning to invest in shares next week and had reason to believe prices would rise tomorrow, wouldn't you consider making your investment a bit earlier to catch the expected rise?
The "success breeds failure" theory helps to explain why October's trading record has been so positive in recent years.
UK shares rose in October in eight of the last nine years by 3.1 per cent on average. Prices even rose during the three bear market years of 2000-2002.
Here is another straw to the wind. April was once the most profitable month on the calendar. Prices fell just seven times between 1942 and the end of the century. But April has already declined three times in the new century. Investors lost money in the last few weeks of April in four of the last five year.
The April record is far from a complete rout of course. But added to the other evidence cited above, it raises an interesting yellow flag warning signal about the future benefits of a November to April investment strategy.
Who ever said investing is easy?
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