Seasonality in a U.S. presidential election year

Most would have no doubt heard the phrase: “Sell in May and go away” over the years. It has developed due to seasonal trends in equity markets linked to money flows and behavioural characteristics. It’s a tendency or bias that may or may not help your investment decisions in any particular year.

We can never know in advance what will happen in markets with certainty, but only know that there is a possibility of a bias or tendency influencing them.

There are many biases that affect buying and selling flows. Periodic front running, month-end, or quarter-end index rebalancing are pretty common. Liquidity flows around holiday periods are sometimes a factor as well.

Our Berman’s Call Pro-Eyes indicators consider two aspects of seasonality as part of the overall risk-return analysis. We have daily index data for U.S. large caps (now called the S&P 500 Index, but there were not always 500 stocks prior to 1957). In this chart, we simply look at the one-month forward average return based on the historical actual. So it creates a seasonality bias of returns.

In the second chart, we use only the current year. We are currently in the fourth year (election) of the presidential cycle. Historically, what we can see is that some years perform better than others. It is, in part, tied into how Congress spends money to buy votes and stay in power and generally who is in control of the fiscal purse.

The sell in May to October seasonal can be seen in the blue line where if we average the one month return from May to October versus the other months, we can see that the first and fourth quarters tend to hold most of the returns compared to the second and third.

When we look at the fourth year of the cycle only, we see that typically the market is flat in the first half and more volatile in the back half. Markets do not like uncertainty, and this year more than most, there is a whole lot of it as it pertains to the U.S. election and foreign and domestic policy implications.

The fact that 2024 has not at all been anything like the historical expectations should remind investors that this type of analysis should not be the main part of your portfolio construction decisions. However, people do get emotional about their portfolio and can make decisions that can be detrimental.

Our message to investors here is that we should likely expect something different to happen with seasonal patterns this year and not to get caught up in the seasonal rhyme.

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