A quirky pattern in US stocks that's existed for 130 years looks set to end

Bryan R. Smith / AFP / Getty Images

One factor unique to US stocks has always held constant since the 19th century: the Dow Jones has had a rough trot at the end of the northern Summer every year that ends in 7.

According to the Wall Street Journal, every decade since 1887 has seen an average fall of 13% between August and November.

The most recent occasion — 2007 — brought the onset of what would become the global financial crisis (GFC), when some of the first cracks started to appear in the market for mortgage-backed securities.

On August 9 that year, French bank BNP Paribas froze three funds stating it was unable to value the complex web of mortgage assets and collateralised debt obligations (CDOs).

That was “the day the world changed“, according to Adam Applegarth, then CEO of Northern Rock, a UK bank that later collapsed and had to be nationalised by the British government.

But this year looks much more rosy amid an environment of steady global growth and record-low volatility. The Dow briefly hit a new record high of 23,000 overnight and it would have to drop around 2,300 points in just 31 trading days to the end of November for the pattern to continue.

In addition, the Dow is up by around 16% so far in 2017 and the late-year falls have typically accompanied broader market under-performance.

The WSJ cited the Stock Traders Almanac to determine that years ending in seven are one of only two in which US stock performance has been negative, with an average change of -2.5%.

However, the recent performance years ending in 7 hasn’t actually been too bad. US stocks climbed in each of the last three decades, including 2007 with the onset of the GFC and 1987, when the Black Monday crash on October 19 saw global markets plummet. On that day, 22.61% was wiped off the Dow Jones Industrial Average as it fell 508 points to 1,738.74.

It turns out early last century was when most of the damage was done, with bear markets in 1907, 1917 and 1937 bringing the average down.

And it will take more than a sharp correction before the end of November to drag US stocks into negative territory this year. That outcome appears unlikely — US stocks haven’t dropped by more than 1% in a session for 42 straight trading days.

The sheer lack of stock volatility has been fairly unique in its own right, and in all likelihood another distinct market pattern will come to an end.

According to the WSJ, stocks typically outperform between November and April compared to the May to October period, but so far this year the market is up almost 10% since May.

It’s likely 2017 will see a reversal to more historical patterns, as the backdrop of steady global growth with low inflation has created a unique “Goldilocks” environment for stocks to flourish.

And in keeping with that theme, that latest investor survey from Bank of America Merril Lynch shows that global fund managers are more confident than ever that these conditions will continue:

Source: BAML

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