Seasonality in Stocks Suggests Volatile Times Ahead

Seasonality in Stocks Suggests Volatile Times Ahead

Seasonality in markets can create expectations and shape sentiment. Market prices increase when buyers are more aggressive than sellers and lower when selling dominates buying. The path of least resistance of prices is a function of sentiment, which creates bullish or bearish trends.

Historical price patterns can offer clues about how sentiment will react at certain times of the year. In commodities, gasoline prices tend to rise during the spring and summer months and fall in the fall and winter as drivers adjust their behavior to supportive or restrictive driving conditions. Meat prices often rise during the late spring and summer months when barbecues come out of storage and the demand for beef and pork increases. Many commodities have various seasonal factors that can guide prices.

The stock market has displayed a pattern of historical seasonal price action. Over many decades, the fall season has been a challenging and treacherous time for stocks. As we move towards the end of the 2022 summer, the seasonal patterns could create stock market downdrafts as there is more than seasonality presenting challenges for equity markets.

History tells us to be cautious in the fall months

• Significant downdrafts in the stock market have come in the fall.
• The Bank Panic of 1907 occurred in October.
• The Great Depression began with the October 1929 stock market crash.
• Black Monday in 1987 occurred in October.

 
Unique challenges for the stock market in 2022

• The Fed is increasing interest rates to battle inflation. Rising interest rates are bearish for stocks as they tend to attract capital away from equities and into fixed-income investments.
• The Q2 GDP data showed the second consecutive quarterly contraction, the textbook definition of a recession.
• The war in Ukraine continues to cause supply-side economic problems, fueling inflation beyond the reach of monetary policies.
• The strongest dollar in two decades reduces multinational US companies’ earnings.
  
  

Markets reflect the economic and geopolitical landscapes

• The geopolitical landscape is causing the highest level of uncertainty in decades. Uncertainty tends to weigh on the stock market.
• China and Russia’s “no-limits” alliance bifurcates the world’s nuclear powers, increasing the potential for conflicts.
• China, the world’s second-leading economy, suffers from an economic decline caused by COVID-19 lockdowns.
• Economic and geopolitical uncertainty tends to weigh on the stock market.
   

US domestic events will take the center of the stage over the coming months

• Political division in the US could peak during the upcoming mid-term elections.
• Criminal and civil investigations could impact the former President, and the potential leading candidate for 2024, may increase political division.
• Given their alliance and objections to US policies towards Ukraine and Taiwan, Russia and China may seek to influence US elections.
  
  

  Fasten your seatbelts for lots of price variance during the seasonally volatile period

• The stock market recovered from lows in June and has made a series of higher lows and higher highs.
• Stocks tend to take the stairs higher and an elevator shaft lower during corrections.
• The stock market is moving into the time of the year when downdrafts are most likely.
• The new base price of the VIX volatility index is around the 20 level, higher than over the past years, a sign that it is only a matter of time before the next downdraft.
• Hedge those portfolios!

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!