Seasonal Investing Report

By Sr Editor on 11-16

I am often asked for examples of my reports. Our Fall and Spring Summary Reports are provided to all membership levels. Since my Fall 2017 summary discussed the seasonal strategy at length and touches on why we have seen strong summer performances this market cycle, I have decided to post an excerpt. Not all the objectives are covered in this excerpt.

Fall 2017 Summary Report Excerpt

Sitting down to start a Summary Report is often difficult because I cannot simply cover everything I would love to. Of course, I realize many members do not want me to cover everything – just let us know how and when to invest. But during this market cycle we have seen a few Summers/Falls with decent gains that our seasonal strategies have missed. So questions arise, including for me.

I decided what better way to start this report than by summarizing the primary objectives of this report.

Understand how the current unfavorable season stacks up with the past.
Understand we are in the largest financial bubble in history in order to prepare for when it ends.
Understand why the markets have been propelled higher than the economy or profits justify.
Understand that bubbles do not pop. They grow and grow especially when they are created by central banks who can print money out-of-thin-air to buy into the markets and stop the ~~free~~ markets from real price discovery.
Understand bonds (fixed income funds, TSP F fund) have been in a secular bull market since Paul Volcker saved the dollar from 12%+ inflation by inducing two recessions with 18% interest rates in 1982. The bond bull market began when he started lowering interest rates in 1982.
Understand past performance of bond funds includes capital gains which are generated by dropping interest rates. If interest rates flatten, then all you get is the current low yield. If rates rise, capital losses subtract from low yields.
Understand that the seasonal influences are always present, but can be overcome by larger influences in the short term such as monetary policy or market resets (bear markets).
Understand seasonal investing increases our winning trades and mitigates losses, but it is not designed to beat buy & hold every year. It is designed to win over the full market cycle of bull and bear markets.
Understand that our primary risk indicator does not care about the economy, profits or monetary policy. It simply tells us when the most risk-sensitive bond investors start to head for the exits so we can exit equity funds.

How each unfavorable season stacks up

First we need a frame of reference prior to looking at the *unfavorable* season performance charts. And our reference is how the *favorable* season for equities has fared since 1980. The returns are shown in order of highest to lowest. The years are denoted at the bottom of the chart. The 1980 return means from the Fall of 1980 until the Spring of 1981.

What is most impressive about the favorable seasons are how few have negative returns. In the six negative years shown, two are from the most recent bear markets which lost over 50% each total. The favorable season during these bear markets lost only 10% and 4%. This means the bulk of the losses occurred during the *unfavorable* season as we will see. The early 80’s were a time of extremely high inflation and interest rates and a transition period from a secular bear market to secular bull market that lasted from 1980 until 2007.

Which brings up an important point – we are looking mainly at returns in a secular (long-term) bull market which will not be repeated during the next 20 years. But the *difference* in performance of the favorable season and unfavorable should.

The next chart shows what our objective seasonal model missed over the Summer and Falls (the unfavorable season). Two of the largest three gains were due to the bear market ending and bouncing back during the summer. If we identify the bear market is over, we could capture some of these gains too. But it is important to understand that the 20% gain in the summer of 2009 did not come close to recouping the bear market losses. The 38% loss missed in the summer of 2008 required a 60% gain to break-even. The entire bear market loss required a 120% gain to break-even.

The “QE rallies” point to three years during the present market cycle that occurred when the central banks were engaged in QE programs (created money to buy financial assets). The largest summer QE rally this cycle was 2013 at close to 10%, the other two were around 5%. Missing the 1987 crash more than made up for missing the 1988 bounce back.

Historically the small cap indexes have exhibited much stronger seasonal tendencies as we see next. Our favorite small company index includes all of the stocks not in the SP500 index, so we simply call it the non-sp500 index. The TSP S fund tracks this index as does the Vanguard VXF ETF. This index started in 1987.

Again we see the best performing summers include the markets bouncing back from major bear markets and recent years when central bank QE programs were in effect. The seasonal strategy has paid off handsomely during bear markets and years with large market corrections or crashes. It has also paid off near market tops.

What all of this translates into over the time frame seen above is seen in the next chart from July 4th 1987 until December 31, 2016. Losses matter more than missing summer gains in the long run.

It’s worked for awhile

But how about the current bull market (half cycle) after the bounce back in 2009 with all the QE summer rallies? The next chart looks at 2010 through 2016. Outside of bear markets, our seasonal strategy makes money during years of large corrections like 2011 and 2015. I actually believe 2015 was a market top thwarted by 4 trillion dollars being dumped into the financial markets in 2016 by global central banks (QE) and it is still on-going in 2017. Which is one of the reasons this unfavorable season will close the gap since 2010 a little more.