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George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario 

Here is some good news for investors: If there is no double dip recession, and the past is representative of the future, the November-to-April period will experience positive stocks returns.

While there are still many unresolved issues with regards to the economic recovery and the financial markets, one thing is certain, whenever the economy has moved into the recovery phase of the business cycle, the November-to-April or "winter" stock market performance was almost always positive.

Recoveries are good for stock markets and recessions are bad. Over the last 54 years, 13 years had a negative return. Out of those 13 years, 11 were recessionary years. If the next year is not a recession, the markets will go higher, particularly over that winter period.

It is, on average, a seasonally strong period for stocks. The average annualized winter return of the equally weighted Canadian Financial Markets Research Centre total universe stock index of the University of Western Ontario over the period from January, 1956, to September, 2009, was 30.04 per cent.

The corresponding number for the May-to-October period was 3.26 per cent. The median values, which are not influenced by possible extreme values, were 28.04 per cent for November to April, and 10.56 per cent for May to October.

Now let's break these two semi-annual periods into recessions and recoveries. The average annualized return for winter was 33.48 per cent during recoveries and 16.23 per cent during recessions. For May to October or "summer," the corresponding numbers were 8.64 per cent during recoveries and minus-21.48 per cent during recessions.

To understand the drivers of such semi-annual stock market performance, one needs to understand the investment decision process. We often hear that institutions make investment decisions, but it is individuals working for institutions that do. These individuals have their own psychologies, over which they may have little control, and agendas, which may differ from those of their organizations.

The winter strength is driven by these agendas. The structure of portfolio managers' remuneration encourages them to maximize their own wealth instead of just seeing to the needs of their clients.

Portfolio managers also exhibit herd mentality. They are safe when their portfolios look similar to those of other managers who invest with the same mandate - no one loses his or her job because of average performance or holding the same securities as their peer group. Herding becomes more pronounced around the end of the year, when their fund's performance is evaluated.

At the beginning of the calendar year, portfolio managers rebalance their portfolios towards risky securities in an effort to beat their benchmarks and make their year-end bonus. They have 12 months to fix any problems that this strategy may entail. Towards the end of the calendar year, portfolio managers "window dress" to spruce up their portfolios by selling stocks that are obscure and have fallen in price and buying stocks (and other securities) that have done well, are visible and are in the public eye. At the same time, portfolio managers lock in good performance by selling risky stocks and moving to lower-risk stocks or investments to secure their bonus.

"Window dressing" and bonus-motivated portfolio rebalancing, exacerbated by herding, affect prices and returns of financial securities throughout the year in a predictable way. Risky stocks are bid up around the turn of the year and down later on in the year, whereas low-risk stocks are bid up towards year end and down around the turn of the year. The pattern repeats annually.

The effect of combining "window dressing" and remuneration-motivated rebalancing, in conjunction with arbitrage that may be taking place by those investors not bound by the restrictions or conflicts portfolio managers are facing, may actually spread the seasonal strength of stocks over a number of months around year-end. As a result, for risky securities, seasonal strength is spread over a number of months around the turn of the year, namely from November to April and a reversal occurs from May to October.

Market participants can not fully arbitrage, and so eliminate, this seasonal behaviour of stock returns. This is because the incentives to engage in "window dressing" and remuneration-motivated portfolio rebalancing by portfolio managers are so strong that even though we know they're happening, markets are unable to eliminate the effect they have on stock prices. Additionally, it's difficult for market participants to take advantage of this seasonality consistently because while the stock market experiences significant strength in winter during economic recoveries, this is not always the case; during recessions, stock market returns are quite often negative during that period. But we can't forecast the business cycle accurately, and so market participants can't bet the farm on this seasonal behaviour happening every year and - in the process - eliminate it. This is particularly true since portfolio managers' survival is based on short-term performance.

So, as the new year approaches, let us all hope for two things, first that there is no double dip recession in 2010 and second that history will repeat itself - for a very happy new year for all investors.