Investment Calendar Effects and Myths

This week we will be examining some calendar effects and myths concerning investments. Many of them can be traced back to over a hundred years ago, and there are several camps of investors who either believe wholeheartedly in these effects or dismiss them all together. It is important to note that myths or old wives’ tales originate from some truth. It is therefore good to be aware of the popular ones, so that one can do their own examination to determine the applicability(if any) for timing their investments. 

Sell in May and go away (Halloween effect)

This originated from a British saying “Sell in May and go away and come on back on St. Leger's Day”, which refers to the St. Leger's Stakes horse race in September, the last leg of the British Triple Crown. Many of the gentry and the merchants would sell their holdings and leave the city for the summer. They would then return in September on St. Leger’s day and renew their investments in the market. A similar phenomenon is observed in the U.S. where trading is usually lessened in the summer months as traders go on vacation and spend more time with their family. The belief is that stock returns are historically lower between the months of May and October. This meant that observed returns over this time period were sometimes lower than short term interest rates. This led many investors to hold cash during that period instead of investing in stocks. Hence, you’ll sometimes hear people saying to “sell in May”.

The October Effect

October tends to be a bad month for markets. This belief was triggered by several significant events. The first one being in 1917 when the communists overthrew the free market Russian economy. The month was filled with forced emigrations and firing squads for the vanquished capitalists. The second such event was the panic of 1907 in October 1907 on Wall Street, and the third one was the crash of 1929 which took place in October (just preceding the Great Depression). More recently, October has been the setting of 1987's Black Monday, as well as the 1997 Asian currency crisis. Eleven years later, portfolios endured another painful October drop kick into the 2008 credit crunch (Subprime crisis) However, interestingly enough September is far worse statistically for the market although October continues to get a bad rap.

Santa Claus Rally

If you listen to financial news outlets like Bloomberg television or CNBC, you may have heard them refer to something called a “Santa Claus rally”. This is defined as an increase in stock prices in the month of December, normally observed in the final week of trading before the new year. This is partly due to the fact that some institutional investors and even some retail investors have to complete certain trades before the end of the year for accounting and tax reasons. The other reasons leads us to the next myth: 

The January Effect

This is a theory that prices increase in the month of January by far more than any other month of the year. This is partially due to the payment of bonuses for many in January which are then invested in the market. Investors, aware of this myth will tend to invest in December in the hopes of capitalizing on the expected increase in January. This reminds me of the upswing many gyms experience at the start of the year when people try to execute their New Year’s resolutions to lose weight by exercising. Most people seek out investments in January.

The July Effect

The research into the myths caused me to stumble on one completely unrelated to finance. It is a very interesting medical myth called the July effect. This is a perceived increase in the risk of medical errors and surgical complications that occurs in association with the time of year in which U.S. medical school graduates begin residencies. A similar period in the United Kingdom is known as the killing season. While this has nothing to do with investments, it may be good to note. Hopefully a bad investment won’t kill you, however, a green medical student just might.

Conclusion

As with all myths, it is based on some truth, and some of them have been studied and found to be accurate some of the times, especially in many of the developed markets. However, a myth cannot take the place of doing the required due diligence on prospective investments. And like all myths, there is just enough truth that you cannot dismiss them out of hand. As with all investments, speak to your financial advisor and determine what is right for you. One rule which won’t fail you is to invest over time to lessen the risk of a large downward swing in your new portfolio. Unfortunately, sometimes your timing really is wrong( maybe due to some of the myths mentioned in this article!) and this can be mitigated by investing small amounts over time.

Yanique Leiba-Ebanks, CFA 

Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm