“More than half of historical annual market returns come from a quarter of the year, during the Nov-Jan period,” writes David Bianco, Deutsche Bank’s Chief US Equity Strategist.
According to his research, the S&P 500 returns 4.2 per cent on average from November to January.
He also took a closer look at a very specific stock market pattern that’s been exhibited this year: a strong start to the year followed by a decline in September and October.
Although the historical sample size is small, the data shows that the next three months are usually good. From Bianco’s note:
Years with strong starts that suffered pull-backs in Sep-Oct like this year, albeit so far this year’s Nov is like most year’s Oct because of the election, are: 1971, 1978, 1979, 1986, 1987, and 1989. The avg. Nov-Jan return of these years was 6.8%. The only year with a negative Nov-Jan was 1989, owing to a correction in Jan 1990 when the economy was seen as fragile and did contract later that year. We expect the S&P 500 to follow history and deliver strong performance into yearend and early 2013 if fiscal cliff related recession risk fades.
And that’s the key caveat: the fiscal cliff. Specifically, Bianco warns that the fragile economy is unlikely to respond well to higher income tax rates.
Here’s the chart from Bianco’s note:
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