Summer firmly descends on the markets

Both equities and bonds are often characterised by particular patterns at this time of year. Danske Bank’s chief strategist, Frank Øland, takes a closer look and outlines his approach to the phenomenon.

The summer holidays are now over for most Danes. In many other countries, however, August marks the start of the holiday period for a lot of people and with it a general slowdown. The financial markets, too, tend to be thinner, with lower volumes and greater volatility. Summer markets often seem less predictable, perhaps even a little unstable. The anecdotal explanation is that junior traders get to take over the helm at this time. But, what is really going on – and do the financial markets exhibit robust seasonal patterns?

What the statistics for the next few months are telling us 
Let us start by noting that the famous “Sell in May and go away” adage is not particularly sound advice. Looking at the US S&P 500 index over the past 30 years, the equity market tends to continue trending higher until mid-July, on average, moves largely sideways or slightly lower going forward to mid-October, and then exhibits decent growth for the rest of the year. Equity market volatility also tends to climb in mid-August and remain elevated until mid-October. If we should steer clear of equity markets for a period based on seasonality, then the time to turn away is not from May, but mainly in August and September.

We are aware of seasonal patterns, but they do not determine our trading activity – for the market never has an average year.

Frank Øland

Chief Strategist, Danske Bank

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.