2013 off to a flying start – the seasonal effect on the Australian stock market

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The Australian share market has entered 2013 with solid momentum. After a 3.2% gain in December, the S&P/ASX 200 index is so far up around 5% for the month of January.

It begs the question: does a good January bode well for the rest of the year? And more generally, are there seasonal effects in the market that investors need to be aware of? Maybe it’s usual for the market to rally strongly around these times of the year, only to give back some of the gains later?

A market for all seasons?

It’s often claimed there are seasonal effects on the market. US investors, for example, are especially nervous around the month of October, as it’s often been the month when major historic market crashes have occurred. There’s also the old adage of “sell in May and go away”, which combined with the alleged “Christmas rally” suggests investors do best buying around the turn of the year, and selling by the middle of the year.

What’s the evidence for the Australian market? For starters, let’s begin by noting the market usually rises each year. Since 1987, for example, the Australian MSCI index market has gained in 18 of the past 26 years – or a 70% strike rate. Add in dividends, and there have been 20 annual gains, or a 77% strike rate. That should give investors some comfort that negative years – uncomfortable as they are – are very much the exception rather than the rule. What’s more, there has been a 60% chance that any one month would produce a positive result.

Does a positive January make much difference? In the 18 positive years since 1987, January has only been positive 60% of the time – or not much different from its average. Statistically, knowing January has been a positive month therefore doesn’t significantly increase the probability of the year overall also being positive.

What’s more, the average annual gain for the years in which January is positive isn’t much different from the average gain in years when January has been negative – since 1987, both have been around 7%.

Blurring months

What about seasonality over the year as a whole? In the main, December has tended to be a positive month for the Australian market, along with April and July especially – while June, and the period between August and November has tended to be softer. Tax loss selling ahead of financial year end has been one local factor to weaken the market in June and boost it again in July.

Note, however, these seasonal effects appear to have diminished over time – with month-to- month differences much less apparent in the past decade compared with that before.

Of course, particularly bad years can distort these averages. To reduce the influence of outliers, we can also compare the degree to which certain months generate positive results compared to what would be expected were there no seasonal effects. As noted above, over the past few decades, the probability of a positive return month has been around 60% – though December, April and July tended to produce an above average number of positive results. In the past decade, however, this apparent seasonal effect has also waned.

Don’t worry, be happy

More formal statistical tests also don’t find much evidence of significant seasonal effects – the different average performances across the calendar months over the past decade or so are not especially unusual given the inherent month-to-month volatility in returns. Indeed, since 2000, the average monthly market gain has been 0.3%, with a standard deviation in monthly performance of 3.7%

All up, this suggests investors need not worry too much about seasonal effects distorting the local market. As would be expected in efficient markets, to the extent seasonal effects may have existed, they appear to have been ironed out over time by savvy traders. While the positive start to the year need not give us any more confidence that the coming year will be positive, it does suggest the gains of late at least reflect underlying demand rather than seasonal quirks, which could unwind soon.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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