It is that time of the year again
Well, this article is going to be about a phenomenon called seasonality. Might you heard about it, if not then see it below;
Let’s start with seasonality, seasonality is referring in stock market investing to a seasonal pattern in the performance of particular stocks, sectors, industries, markets, they tend to follow patterns in different part of the year. Might you heard about few of them;
Halloween effect
January effect
Santa Claus rally
Sell in May and go away
These effects are referring to patterns in the market. Are these effects myth or real? Heavy questions considering if we believe in the efficient market theory.
Are there any reference behind these assumptions?
Well, let’s have a look at few research papers in that regards, but before let me explain what is e.g; January effect is referring to US stocks (studies were conducted on S&P 500 companies) tend to perform better in January then in the rest of the year, that’s the most well known phenomenon but there are others like the aforementioned ones. So if we believe that phenomenon is real than we have to accept that the market is not efficient, otherwise the January effect wouldn’t exist. Furthermore, than we have to look at December like a month to purchase equities and sell them on later in the end of January, but I wouldn’t suggest to getting into trading, it’s a whole lot different thing and not for us who strive to FiRe.
The January effect came into picture after a study was published in the Journal of Business in 1942 by economist Sidney B. Wachtel titled “Certain Observations on Seasonal Movements in Stock Prices,".
If you are interested you can find more information about the paper here and you can read more about the topic here.
After this paper, many more had the same conclusion and nowadays economist argue that the January effect does not provide an arbitrage opportunity anymore as the market became more efficient and including the trading costs the arbitrage opportunity is too negligible to exploit them.
The January effect was tried to be explained by academics in multiple ways some mentioned that it is because of individual investors whom liquidating their losing shares in December due to reduce their capital gain tax and repurchase shares in January.
Other academics argue that it is because of the bonuses being invested in the stock market, meanwhile others explain that phenomenon with new years resolutions as people start to invest in the beginning of the year as part of their new year’s resolution.
Seasonality does exist also in different markets, seasonality exists in different industries, among certain companies that tend to perform better during certain time of the year and investors whom put in the effort to study them, they can exploit them and use these arbitrage opportunities, e.g; Winter portfolio in the UK.
At the moment it seems like we are getting into a bear market and it’s December considering the January effect, it can mean only one thing; BUY.
The classical meaning of a bear market is when the major indices drop 20% or more in a short period of time, this is the situation right now, please see this article here.
Discounted shares are everywhere especially compared to the prices couple of months ago.
There are emotions involved especially in a bear market when all the shares are just dropping, but investors have to forget about the short term fluctuations and look at the prices as discounts, we all love discounts so it shouldn’t be any different right now.
Keep on buying, grab the discounts and later on you are going to look back at it as one of your best decisions.
It’s time in the market and not timing the market - that must be your motto right now.
So let’s summarise this article, it’s already winter, prices tend to drop in December, in top of that we entered into a bear market, we are after a huge market drop due to multiple events in the market (rising interest rates, trade war between USA and China, Brexit, protests all over France, budget deficit in Italy) so this is the perfect time to buy.
Investing it’s not equal of trading, investing is for the long run. Let’s keep our eyes on the price and don’t let us be fooled by short term market movements, we’ve got decades to go.
Keep on saving and use your savings to invest, saving for the sake of saving is not enough, it’s time to invest and create another source of income to reach FiRe.
Your sincerely
To/Minimal
