For generations, investors have sought a surefire strategy to buy low and sell high. They have chased fleeting patterns that appear with the changing of the calendar.
Among the most persistent of these are the “January effect”, the “sell in May and go away” adage, the “summer doldrums” and the volatility of presidential election years. While these market trends have long been speculated on, relying on them as a primary investment strategy is likely to be a dangerous game.
The “January effect” is perhaps the best known of these seasonal patterns. It suggests that the stock market has a tendency to rise more in January than in other months. The explanation of this phenomenon has changed over time, but the most commonly cited reason is tax-loss harvesting. Investors sell stocks at the end of the year for tax purposes and then reinvest in January, driving prices up. Another explanation is that investors are re-engaging with the market and rebalancing portfolios after the holiday season.
However, the record shows that there is no statistically repeatable pattern on which to base a trading strategy. In fact, January has been the highest return month in only four of the last 20 years: 2012, 2013, 2018, 2019, according to data from Morningstar Direct as at 15 January 2025.
The “sell in May and go away” theme suggests investors should sell stocks in May to avoid the possibility of market decline over the Northern Hemisphere summer and autumn, then reinvest in November. Historical data does indicate that the S&P 500 has gained an average of 6.3 per cent during the Northern Hemisphere winter months (November to April) compared to a 3 per cent average gain from May to October since 1990.
However, trying to time the market this way could cause investors to miss significant gains. For example, from May through October 2009, the S&P 500 increased approximately 20 per cent. So, this is not a reliable trend.
Neither is the “summer doldrums”, which refers to the tendency for market activity to slow from June through August. This idea dates back centuries when London bankers and merchants would leave the big cities for the summer. There is some modern-day merit to the idea as the S&P 500 often experiences some of its lowest trading volume during the summer vacation season. However, this lighter volume on its own is not meaningful and is to be expected, since there are fewer active buyers and sellers in the market.
Finally, US presidential election cycles are also thought to bring about seasonal market trends. Many people hear that stock market volatility tends to increase in the run-up to US election day and then decreases afterwards. While some investors might try to trade based on this, professional portfolio managers tend to stay the course and don’t let election year trends impact how they select securities or make asset allocation decisions.
Data from 2024 showed that some 401(k) investors reacted quickly to short-term news by moving funds out of equities to fixed income prior to the election. Then, when stocks soared on the outcome of the election, the money moved back into equities, a strategy that ultimately was less than ideal since investors sold low and bought high.
The problem with seasonal market trends is that they rely on past performance, which is never a guarantee of future results. No one can predict the optimal time for getting in and out of the market. In fact, missing the market’s best days can have a disastrous impact on investors’ portfolio.
Instead of trying to time the market, a more reliable approach is dollar-cost averaging. By consistently investing in both good and bad markets you purchase more shares when stock prices are lower and fewer shares when they are higher. This can help to smooth out the effects of volatility on your portfolio during turbulent times and lower your average investment cost. However, dollar-cost averaging does not ensure a profit, nor does it protect against loss in declining markets.
Ultimately, the best approach is to create a long-term investment plan that is appropriate for your needs and risk tolerance and then stick to it. Don’t get caught up in chasing market trends which may not exist at all. Markets can change quickly, and it’s important to be comfortable with your plan and your emotions in the face of uncertainty.
As some have said, “The trend is your friend – until it ends.”
Trey Byrd, financial consultant, American Century Investments
