25th November 2016
Trevor Greetham, Head of Multi Asset at Royal London Asset Management (RLAM), comments on Black Friday and the impact on stock markets:
The summer doldrums are over and US equity markets are making new highs in a move that we have been backing in the multi asset funds we manage.
This is Black Friday, the day after Thanksgiving that signals the start of the Christmas spending season in America. It also marks the start of the seasonally stronger part of the calendar year for stocks. Research shows that the old adage, “Sell in May and go away” works in the sense that summer markets tend to be volatile and directionless but it’s generally a good idea to get back into stocks in time for a year end rally. There are good reasons for this phenomenon. Life is seasonal. Consumer spending varies massively throughout the calendar year so why shouldn’t stock prices?
We are used to seeing “seasonally adjusted” figures that iron out the peaks and troughs in spending patterns over the year. Unadjusted data shows a surge in activity in the run up to Christmas and a relatively dull period over the summer (chart 1).
Black Friday got its name as traditionally this was the day in the calendar year on which US retailer profit and loss accounts went out of the red and into the black. It’s in November. The surge in business activity towards year end usually coincides with the start of better stock market returns. Almost all of the US and UK equity market returns over the last forty years have accrued over the October to May period (chart 2 and table 1).
Seasonality is only one of a range of factors in deciding an investment strategy and rarely the dominant factor. However, the fundamental backdrop for stocks is also getting more positive with global growth picking up even before Trump’s reflationary policies are factored in. Of course, there remain many important unknowns as to how a Trump presidency will operate and markets may well have to content with some negative shocks. We have been overweight stocks versus bonds all year but with our investor sentiment indicator (chart 3) close to euphoric territory we are not chasing the rally.