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There is a variety of seasonal patterns that experienced and inexperienced traders alike look towards when making decisions about their investment strategies, particularly the old phrase ‘sell in May and go away’. This old Wall Street truism suggests that stock markets perform better during the winter than they do in the summer. Often, such dips and rises can become a self-fulfilling prophecy, so investors would do well to be aware of them.

But why is it the case that equities do better in the winter? For one, there is just generally less activity in the markets in the summer months, with fewer active investors making trades. Moreover, as traders’ and companies’ tax years come to an end, there tends to be an uptick in the amount of capital available for equities investments, which translates to a higher stock market performance. Indeed, there is a wealth of evidence to back this up.
 

Tracking dips and gains

Take the Dax between the 31^st of October and the 1^st of April, for example. In the last 35 years, investors with holdings in the Dax would have enjoyed annualized returns of +14.25%, achieving a maximum profit of +36.81%. Similarly, during the same time period, EuroStoxx 50 investments garnered a winning trade percentage of 71.43% and average returns of +4.34%.

Even if we expand the time period parameters to explore this trend further over the last 71 years, we will find that the S&P500 has experienced an average return of +4.85% and a win percentage of 70.83% between the 31^st of October and the 1^st of April. This provides further corroboration of the “sell in May and stay away” adage.

In the summer, however, it’s clear to see that stocks perform less admirably. Using the S&P500 as an example, between the 1^st of May and the 31^st of October, investors with holdings in the fund will have enjoyed average returns of just +1.17% in the last 71 years. Just 64.79% of trades have been successful in that time, lending further credence to the existence of a seasonal trend.
 

Testing the theory in the present economic landscape

However, if the turbulence of this year is anything to go by, making grand assumptions about how stocks might perform this winter is probably not the best course of action, especially because of the conflict in Ukraine, skyrocketing inflation, political turmoil in Westminster, and the threat of a looming recession. Indeed, the FTSE100 has taken an -4% hit since the beginning of the year, trading at around the 7000 mark at the time of writing. This reflects the pressure the stock markets have been under. With this in mind, which current economic factors might contradict the normal seasonal pattern this winter?
 

War in Ukraine

An obvious first factor that could undermine the implied logic of the ‘sell in May and go away’ adage is the war in Ukraine, which has decimated already crumbling global supply chains and created an incredibly volatile environment in the energy markets. The impact of the war has pushed inflation into double figures (10.1%) and forced electricity and gas costs to rise by 65% and 141%, despite the government’s energy price guarantee. Cumulatively, these factors have compelled businesses to increase their prices and maintain their profit margins, which has driven many stocks down in value (e.g. Tesco has gone down by 28% in 2022). As a result, stock markets will likely struggle if the war in Ukraine continues to exacerbate inflation and energy costs.
 

Central bank hiking cycles

The fallout of the war has made it necessary for central banks to hike interest rates. However, while hiking cycles are a useful tool in the battle against inflation, investors are increasingly worried that the BoE's actions are bringing the UK dangerously close to the brink of a recession. As a result of this, the FTSE 250 has already decreased by more than 25% this year (at the time of writing). Contrarily, the FTSE 250 only dropped by 6.16% in 2020 and increased by 10.6% in 2021, despite the pandemic. Such figures, when combined with the prospect of further interest rate hikes, are likely to drive investor confidence down this winter.
 

The impact of the cost-of-living crisis

With household bills on the rise, consumer confidence and disposable income have been on the decline. In August, month-on-month spending power went down 10.7%, while September’s consumer confidence figures dipped to their lowest ebb since 1974. The impact of such declines could be immeasurable on the share prices of retail and hospitality businesses especially, particularly as Christmas looms.
 

Light at the end of the tunnel

Despite the apparent doom and gloom of these pressures on the performance of the stock markets this winter, the prospect of a ‘January spike’ should be of some comfort to investors. Since traders and investors typically have new money to invest, stock markets have historically fared well in January. As such, share values often increase, especially amongst small-cap companies.

Additionally, the data from the money supply figures indicate that the Fed has almost defeated inflation. As a result, chances are that a halt in the Fed's rate hike cycle will present investors with fresh opportunities in the UK’s stock markets. Currently, the FTSE100 is trading at a 20% discount to its European counterparts. As such, despite the fact that the fund is trading at about 8.7 times the price/earnings ratio and two standard deviations below its 10-year average, investors who turn bullish ahead of a Fed hiking cycle pause could benefit from such discounts. Indeed, if the pressures on UK stock performance that I’ve listed above recede, these investments could be particularly fruitful.

Given the degree of uncertainty and volatility in the global economy, it is difficult to anticipate how the markets will move. However, if investors can keep seasonal patterns in mind, and respond to the performance of the markets in the best possible fashion for their portfolios, there are certainly opportunities to be had this winter.

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