EFG Asset Management’s Charles Monchau on stock market seasonality, and returns of 6,700%

If an individual invested in the Dow Jones Industrials Index from 1 November to 30 April every year from 1949 to 2010 – the ‘winter season’ – and held cash in their account for the remainder of each year, he would have recorded a gain of 6688%, before tax.

If, over the same 56-year period, an investor had invested in the same index from 1 May to 31 October – the ‘summer season’ – and held cash in their account for the remainder of each year, his performance would be slightly negative, of -1.9%.

This translated to -0.1% annualized for summer, and 14.7% annualized, for winter.
‘Summer’ periods produced an average gain of 0.4%, versus 7.6% from ‘winter’ periods.

The median measure was 2.5% for summer, 7.6% for winter. There was a maximum measure of 19.2% for summer and 29.8% for winter, and lowest of -27.3% for summer, versus 14% for winter.


Wall Street has long been aware of this seasonality trend, generating an old maxim to ‘sell in May and go away’.

One would thus have expected that investment managers would have exploited this market inefficiency, thus reducing the seasonality effect.

But analysis of the last 10 years data shows that the seasonality factor remains strong. Furthermore, researchers have found that this seasonal impact is pervasive – present in numerous countries, significant in size and statistically robust over time.
There are reasons behind seasonal trends. First, money flows and liquidity are more favorable towards year-end and the first quarter than during the summer. Indeed, volume tends to dry up in the summer months.

On the other hand, the end and the beginning of a year are rather active months and benefit from dividend distributions from corporations, payment of bonuses, contributions to 401k, etc.

But this seasonal pattern is also due to the fact that investors, governments, CEOs, etc. are more optimistic during ‘winter’ than in ‘summer’.

For instance, governments and economists tend to upgrade forecasts for the next year as year-end approaches; but they then tend to adjust their forecasts downward as the year progress. Furthermore, asset allocators and hedge fund managers tend to take more risk at the beginning of a period.

While we take seasonality into account in our process, it is only one factor we consider among others. Indeed, the ‘winter season’ can in some years produce sub-par or even negative results.

It is the cumulative gain over time that is impressive – see the accompanying chart – but there is no guarantee that investors in a ‘winter season’ will generate gains.
One should thus be cognizant of stock market seasonality but also understand that this is not a stand-alone indicator.

Charles Monchau is head of discretionary asset management at EFG Asset Management in Geneva.


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