To everything…

  By Guest Blogger Ryan Lewenza

And so it begins. Last weekend we stuffed ourselves with turkey, gravy and some red stuff in a can, to the point where we began to sweat and ultimately fell asleep. I think I might have even pulled an “Al Bundy” falling asleep with a hand tucked in my waist band. Not pretty!

Thanksgiving of course marks the beginning of the holiday season where we spend time with family and friends, drink and eat too much, and if we’re lucky, see some nice gains in our investment portfolio. In this week’s post I examine the positive seasonality for equities, which begins in November and December and goes into May, representing the best six-month period for the equity markets. Will it play out again this year, or we will get a lump of coal in our stockings?

It’s been another decent year for the equity markets, in-line with our expectations, for the most part. As of October 12th, the S&P 500, Nasdaq, and TSX are up 13.9%, 22.5% and 3.0%, respectively, on a price return basis. We called for additional gains this year as the global economy continued to improve, corporate profits rebounded and the technicals remained bullish.

Historically, October has been a weaker month for the equity markets so it’s possible that we could see some volatility over the next few weeks. However, this could then set us up nicely for November and into year-end.

Below we illustrate the “typical” or average performance of the S&P 500 and TSX over the calendar year. You will note that the equity markets typically surge in late October/early November and rally into year-end, hence why we call this the “Santa Claus rally”. In fact, we are close to entering the best seasonal period for equities, which lasts from November into May. In the chart below we show that the average performance for the S&P 500 is 7.4% in the November through May period, far outperforming the June through October period at 0.7%. Could we see this seasonal tendency play out again?

Seasonality Turns Bullish In November

Source: Turner Investments, Bloomberg

November to May is the Strongest Period for Equities

Source: Turner Investments, Bloomberg

First, let me state the obvious that these market tendencies and are not 100% fool proof. There are numerous years where this doesn’t play out, either because of a downturn in the economy/stock market or due to some type of exogenous shocks. An example of a “shock” could be North Korea sending a rocket into South Korea or Japan, or President Trump going further off the rails.

So there is no guarantee the equity markers experience this seasonal rally, but we believe the odds are stacked up in favour of year-end strength given the following factors:

1. The global economy is accelerating: Over the course of the year we’ve seen the global economy pick up with growth broadening out across key countries and regions. We’ve seen economic growth accelerate in China, Europe, US and even Canada with our economy growing at a robust 4% in the first half. One of my favourite economic indicators, the Citigroup Economic Surprise Index, which measures whether economic data is coming in above economists’ expectations, has rebounded and recently turned positive. If this continues it could provide further support for equities as we have found that the S&P 500 returns on average 2.4% from the time the Citigroup Economic Surprise Index turns positive to its peak, with the S&P 500 up 70% of the time. Those are decent odds.

2. Corporate profits are robust: The big story this year is that corporate profits have rebounded strongly which, in part, explains why we continue to see new all-time highs in the US markets. For example, S&P 500 and TSX earnings are up on average 17% and 28%, respectively, in the first half. We see this continuing, helping to drive equity prices even higher.

3. Technicals remain bullish: Finally, we’re big trend followers, as we have found that it generally pays to invest with long-term trends rather than go against them. And on that front things look great! The S&P 500 remains in a long-term uptrend, is above key moving averages and we see good market breadth in the US equity markets. Global equities have also broken out to new all-time highs and even the lagging TSX is starting to show some strength, recently breaking above its downtrend. We see better days ahead for our TSX market.

Putting it all together, the fundamental and technical outlook remains bullish so stay the course. Add in the fact that we’re entering the strongest seasonal period for equities, we see the potential for a year-end rally, adding to the already solid gains. If correct, it should help set us up for a good holiday season.

Citigroup US Surprise Index Has Turned Positive

Source: Turner Investments, Bloomberg

Ryan Lewenza, CFA,CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.