Folks in New England are sick of the last month of weather. It’s been a rainy season, for sure. But a new season is about to start for the stock market. When it comes to stock market seasonality, the worst few months are ahead of us.
“Seasonality” refers to the tendency of the stock market to perform certain ways throughout the year. Ever hear the phrase, “Sell in May and go away?” That saying is attributed to seasonality. According to Renaissance Macro Research, since 1928, the return of the S&P 500 from July 27 until October 27 has averaged a negative 0.2%. That compares to an average three-month return of a positive 1.9%.
I know it’s not that big a deal in terms of absolute returns. That’s my point. Suppose you thought the stock market was a bit risky right now, or maybe you need to withdraw cash within the next few months. You could sell some of your equity today and, historically speaking, not have to worry about missing out on significant returns.
That three-month stretch for 2021 began with a two-day Federal Reserve meeting, on July 27 and 28. Their Federal Open Market Committee kept its target interest rate, the Federal Funds Rate, at a range between zero and 0.25%. That was expected. I, however, did not expect Fed Chairman Jerome Powell to state, “We have not reached substantial further progress yet.” The Fed has been saying that they won’t be tightening monetary policy until the economy achieved “substantial further progress.” A couple of weeks ago, I opined that the economy had made such progress and that the Fed should soon illuminate a path to tightening.
According to Chairman Powell, I was wrong. Not that I was in bad company. San Francisco Fed President Mary Daly, St. Louis Fed President James Bullard, and New York Fed President John Williams all agreed with me, to some extent. But saying so just makes me feel better about being wrong.
As I explained previously, the Fed can tighten monetary policy (traditionally bad for stockholders) by raising interest rates. That’s probably a 2022 conversation, at the earliest. They can also taper the purchase of bonds. The Central Bank is buying $120 billion a month of bonds, with $80 billion going to Treasuries and $40 billion going to mortgage-backed securities. This process is called quantitative easing.
I expect the Fed will reduce the amount of bond-buying by the end of the year. Buying bonds is good for stockholders, but the stock market doesn’t seem to like the idea of buying fewer bonds. For the stock market, a good thing isn’t a good thing if it’s less of a good thing.
The Fed helped bail the U.S. economy out of the 2009 Financial Crisis. Four years later, at the January 29–30, 2013 Federal Reserve policy meeting, the Fed announced they wanted to end the quantitative easing of that period. They were buying $85 billion of bonds per month. Again, this was in January. Following their December 17–19, 2013 policy meeting, the Fed finally decided to reduce its monthly bond purchases from $85 billion to $75 billion. It ended with a final $15 billion purchase in October 2014.
Throughout that year, the stock market had some bumpy rides. But here’s the thing, over the not-that-long run, the stock market shook it off and continued to recover.
If you decide to take cover and sell stocks because the next few months might not generate significant returns, I’d understand. But don’t forget to reinvest your cash back into the market.
This article originally appeared in The Berkshire Edge on August 2, 2021.