There is no clear-cut reason for this seasonal pattern. One obvious explanation for August is the summer holidays. However, the worst month for equity markets tends to be September, so other factors than holidays must be at play. Coincidence may be the main explanation. However, if sufficient numbers take what has happened in previous years into consideration in their investment decisions, then these patterns can become self-fulfilling. Technical analysis may also provide an answer to this seasonality effect.
Also seasonal patterns in fixed income markets
Seasonal patterns are not only a factor for equity markets. The fixed income market, too, also exhibits a degree of seasonality. Yields on 10-year US Treasury bonds, for example, tend to decline, on average, between the end of May and mid-October, which in turn of course means bond prices tend to rise. Hence, “buy in May”, may actually be the more appropriate adage here.
Meanwhile, credit spreads on so-called high yield bonds – in other words, the excess yield on low credit-quality corporate bonds relative to more secure government bonds – tend to increase slightly during this period, so seasonal patterns here suggest you should be a little careful about what exactly you buy.
How we handle the historical patterns
We are aware of seasonal patterns, but they do not determine our trading activity – for the market never has an average year. It is like the weather. July is generally warm and sunny, but even if we plan well ahead and holiday in Denmark at this time, most of us have nevertheless experienced cold, damp days and even torrential downpours. That is why it pays to keep an eye on the weather forecast and not just look at climate norms. Likewise, we concentrate on current market themes, valuations, etc., and invest based on these factors regardless of seasonal patterns.
This content is not investment advice - you should always speak to an advisor about how a possible investment matches your investment profile before making an investment.