Expected Returns: An Investor's Guide to Harvesting Market Rewards

25

Seasonal regularities

• Seasonal patterns in average returns are often weak, possibly spurious, and costly to exploit.

• The best known seasonal pattern is the January effect. Not just small-cap stocks but also the most volatile stocks and high-yield credits earn much of their outperformance in January.

• The January effect and other regularities that appear related—the January barometer and the Hallowe’en effect—may be due to seasonally high investor risk appetite at the beginning of the year. This story is closer to the traditional window-dressing explanation than to the tax-loss-selling explanation. Other evidence on heightened gambling preferences around New Year’s Day support this story.

• For commodity prices, seasonals can be pronounced for sound economic reasons (supply and demand).

25.1 SEASONAL, CYCLICAL, AND SECULAR PATTERNS IN ASSET RETURNS

This chapter and the next two cover seasonal, cyclical, and secular patterns in historical returns. Calendar seasonals can be within day, day of week, day of month, or month of year. Other seasonals cover patterns as diverse as announcement day, pre-holiday, lunar cycle, harvesting season, and political cycle. I focus on monthly seasonals and especially the most robust seasonal: January-related effects.

Most published seasonal studies deal with equity market regularities. I review empirical evidence in both equity and other markets. Historically, average equity market returns have been high in December–January and negative ...