Besides wanting to wish all of our clients, friends and families a Happy Holiday season, I thought I would write a quick blog on Seasonality in the markets.
Looking back at the last 4 Decembers and Januaries, it is quite interesting that January has been rather unkind to the S&P 500 (SPX) while it has been very kind to the 10yr US Treasury Bond.
Here is a simple table showing the Total Returns for both asset classes. Remember that the normal correlation is that when stocks do well, bonds typically do poorly, and vice versa.
Now, I am obviously making an assumption that December 2016 Total Returns will be largely unchanged from today.
So on average, December has been a fairly benign month for both stocks and bonds but January is a different story...stocks have been pounded into submission the last 3yrs and bonds have done extremely well. Why?
A big part of the reason is called "window dressing". This is where fund managers, mutual fund managers etc all want to report or show their portfolio as following the prevailing trend. And as we all know the prevailing trend, post US election, has been stocks up and bonds down. Taking the contrarian bet may not be what investors want and most fund managers are more worried about collecting and keeping assets than true performance. So they all fall in line with the prevailing trend. Come January, they worry less about window dressing because they may only report their portfolio every quarter or six months.
Another reason why there is not a lot of selling in December is because taxes are going to drop in January so why sell today? Best to sell in January when you would have a lower marginal tax rate.
Let's see how January ends up. I need to run out for a Christmas lunch with a very good friend so I leave this with you and wish you a safe and happy holiday and hope that 2017 is as good as 2016 (at least from an investing point of view). Cheers.