We are entering a period of historically strong seasonal trends when money is flowing, stocks are performing better, and volatility is receding. History is a great guide into market behavior and patterns, because they repeat themselves month after month, year after year. It’s very easy to spot these trends and simply follow along, knowing that the odds are sharply in your favor.
But as Mark Twain once said, “History doesn’t repeat itself, but it does often rhyme.” In trading, this means we are unlikely to exactly repeat a previous year’s performance.
Market performance has been mixed this year
In 2023, we have seen mixed performance from the indices. Small caps are down for the year, the industrials are barely green, and if you look at the equal-weighted SPX 500 and Nasdaq, you’ll notice that the average stock is not up much at all. I’ve heard many people are feeling better about their stock market investments in 2023, but frankly I don’t see how that is true. The stock market has not performed well for first nine months of the year.
Can seasonal trends overcome some obstacles?
So, will the seasonally strong period turn things around and push the markets higher? It’s very possible, but many other things need to fall in place for that to happen. Interest rates remain stubbornly high, and according to the Federal Reserve, they will be high for quite some time. This is our punishment for having too much discretionary money, too much stimulus from the pandemic, and too much bond buying. The sugar high is wearing off, and we are not adjusting well to a tighter monetary environment.
The government is not helping the stock market, either. A very real government shutdown could be right around the corner. Remember last month when the threat of a shutdown caused the market to correct sharply? It could happen again.
Soon many traders will be talking about the Santa Claus rally period (typically the last two weeks of the year and into the new year). You may hear them say that buyers will suddenly pile into stocks regardless of conditions. I don’t believe the environment is fertile for an end of year rally. The fundamentals, like high valuations, poor margins, and higher wages, are simply not strong enough to support stock prices advancing.
However, those conditions have been present in the past, and seasonal trends have overcome those obstacles. If you fought the calendar when odds were stacked against traders, you probably lost. So, watch the action carefully and be selective. Have some puts handy at all times and be ready for anything – not just a bullish market.