Table of Contents
Understanding Seasonality in Australian Stocks: A Closer Look at Market Cycles
Investors are well aware that financial markets operate in cyclical patterns; however, many overlook that some of these cycles follow a calendar rather than a business cycle. This is the essence of seasonality—return patterns that occur consistently at around the same time each year, akin to the market’s “circadian rhythm.”
Certain markets, especially agriculture, exhibit clear seasonal trends tied to climatic changes. Stock markets too show cyclical behaviours, influenced by regular events like earnings announcements, dividend distributions, and major holidays such as the Northern Hemisphere’s summer break. For those analysing seasonal trends in Australian equities, using appropriate indices is essential. Instead of relying on price-only indices like the S&P ASX 200, which can be skewed by dividend payments, investors should consider total return data that incorporates dividends and franking credits.
Enter the All Ordinaries Total Return Index (XAOA), a benchmark that includes the top 500 ASX-listed stocks and accounts for dividend contributions. This index serves as a crucial tool for examining seasonal performance in the Australian stock market.
November typically presents a strong month for investors, yet this year saw a disappointing -2.5% drop in the XAOA, marking its weakest performance since 2014. This anomaly raises questions about its implications for December and the famous ‘Santa Claus Rally’ headed into January.
A Seasonal Review of Monthly Returns
To grasp monthly trends, I assess XAOA returns over multiple periods—5 to 10 years for short-term trends and longer durations (20-40 years) for more enduring patterns. Key findings across these timeframes reveal several consistent trends:
- Strong months: April, July, December
- Weak months: May-June, September
- Peak windows: July-August and November-January
The phrase "Sell in May and go away" captures the typically weak May-June period, while the "Santa Claus Rally" points to the strength typically seen in late December through early January. Interestingly, September is identified as particularly poor for returns, displaying negative averages across all timeframes analysed.
The Reliability of Monthly Returns
When examining the reliability of each month, the data offers insightful implications:
- Most reliable month: July, with an 85.7% chance of positive returns.
- Least reliable month: September, which also marks a pattern of decline—highlighting a 42.7% reliability rate for positive returns.
- Notably, November’s reliability stands at around 61%, indicating some unpredictability after its weak performance this year.
November’s Performance: A Bellwether for December?
The soft performance of November becomes a focal point when considering December’s outcomes. Analysis shows that:
- The average December return following a down November is +1.91%, while it increases to +2.54% after an up month.
Despite the trend suggesting slightly better December performances after positive November returns, December remains historically positive regardless of November’s performance.
The seasonality metrics thus indicate no solid correlation between a down November and diminished December performance. In fact, data from recent years illustrates a stronger December following a weak November.
January Outlook: Potential Pitfalls Ahead?
While December’s performance looks promising, one key concern lingers—what happens in January post a poor November? The data shows that January often performs worse after a down November, leading to median losses of -5.38%, -2.76%, -1.71%, and -0.30% across different timeframes.
This trend underscores market psychology’s significance—where December rallies can overshadow November’s downturns, but the latter often resurfaces to weigh down January results.
Conclusion: The Seasonal Landscape of Australian Equities
The unpredictability of financial markets is well-documented; however, recognising and understanding seasonal patterns like the Santa Claus Rally can lend perspective to investment strategies. While seasonality does not guarantee outcomes, it provides valuable context for trends and behaviours within the market.
This year’s data suggests that while a Santa Claus Rally appears likely, the vulnerability of Australian shares following November’s disappointing results may lessen the momentum into the subsequent months. Consequently, investors might consider this analysis when shaping their expectations and investment decisions for the festive season and beyond.
