Seasonality and the Stock Market

Seasonality and the Stock Market

2006 Volume 9 Issue 4

Stock market investing is risky and ideas on how to succeed are abundant. Most novice investors are overwhelmed with conflicting opinions espoused by brokerage houses, magazines, and other media. It seems that the most broadly disseminated personal investment advice is mediocre; otherwise the public would likely be wealthier. The purpose of this article is to question the popular notion that it is wise to buy and hold stock market investments and not worry about market declines along the way.

Holding stock market positions during the recent major decline from 2000 to 2002 has caused many investors to question the Buy and Hold Strategy (BHS). The basic premise of this study is to argue that risk may actually increase the time in which an investor is exposed to the market. This premise is something that many investment advisors argue against. In addition, this article will attempt to demonstrate that not only may risk be reduced, but returns may also actually improve the less time that one is invested in the market.

Research from 1970 to 2005 reveals that there seems to be periods during the year when the market does well and periods when it performs poorly. This pattern is called seasonal investing by some. A discussion of this concept is described by Sy Harding in his book Riding the Bear: How to Prosper in the Coming Bear Market.[1] Harding argues that the strategy of buying stocks on November 1 and selling on April 30 is consistently the best time for favorable stock market performance. We will call this the Favorable Period Strategy (FPS). On the other hand, Harding[2] terms the period from May 1 to October 31 the most negative or unfavorable period for the market. We will call this unfavorable period the Unfavorable Period Strategy (UPS).

For the sake of this study, we will use a common benchmark for the market: the Dow Jones Industrial Average (DJIA). While other indexes could have been used, such as the Standard & Poor’s 500 Index (S&P 500) and others, risk seems to be higher over time for these alternative indexes. For example, when the “Ulcer Index” (UI) was measured for the DJIA and the S&P’s 500 over the study period (1970-2005), it was found that the DJIA had an (UI) of 13 percent, while the S&P’s 500 had a reading of 16 percent. The (UI) is the measure of the amount of price declines from stock market peaks over a period of time. The lower the reading is, the lower the risk.

Further study reveals that other broader based indexes, such as the Russell 2000 and others, had even higher Ulcer Index readings than the S&P’s 500. During severe market declines, the indexes with higher Ulcer Index readings fall faster and further in price. Since this study is concerned with risk reduction, the DJIA was selected over other available market indexes.

The central problem with simply buying and holding the DJIA (which can be in the form of an index fund, etc.), is concern with a “drawdown,” or an unrealized loss. For example, assume that at some point your total account value is $50,000. Then the market falls a bit and your account value drops to $45,000. You have just suffered a 10 percent drawdown (loss divided by starting account value). Now assume that the stock market skyrockets for a few years and your account grows to $200,000. Then the market corrects down -35 percent. Your account loses $70,000. At this point no one is sure how far the market may continue to fall. Everyone is often so negative that the temptation to sell is irresistible (often at near bottoms). Thus the problem with a buy and hold strategy is that it is easy to stick with when the market is rising, but not when it is falling.

There are other reasons that a simple buy and hold strategy may not always work for investors. For example, the market can move sideways or down for periods as long as ten years. The total return for the DJIA during the entire decade of the 1970’s was only 3.65 percent! In addition, long-term market declines are more painful the more money one has invested. A $10,000 investment is not the concern that a $200,000 investment is during a severe prolonged drop. A buy and hold strategy is vulnerable to volatility and sometimes to sharp market declines along the way.

How Losses Can Hurt Performance

Losses can damage one’s portfolio more dramatically than is commonly understood. For example, assume that a hypothetical portfolio begins with a $10,000 investment and that it has the good fortune to consistently earn 17 percent over a ten-year period. (While taxes and inflation constitute a part of real life, they will not be considered here.) At the end of the tenth year, the value of the portfolio would be $48,070.

Now, further assume that the same portfolio loses 10 percent of its value every other year, but is able to earn 27 percent in the alternate years. One might think that the end result would be similar, but it is not. Given this scenario, at the end of the tenth year, the value of the portfolio would be only $19,500. This amount is less than half the value of the consistent no-loss strategy. In fact, to achieve approximately the same value as afforded by the consistent 17 percent annual return, the portfolio that loses 10 percent in alternate years would need to actually earn 52 percent during the positive years.

The foregoing arithmetic example illustrates how periodic losses to one’s portfolio require gains that are much larger than the losses themselves in order to offset them. The philosophy that underlies the seasonal investing strategy is that the more that losses can be eliminated or reduced, the greater is the reduction of risk and therefore the better the chance for greater profits.

A further discussion of the above scenario assumes the period from 1970 to 2005 and also assumes the use of the DJIA. While other Indexes such as the Standard and Poor’s 500, Russell 2000, etc. had different absolute loss amounts, the DJIA was used to remain consistent with assumptions made earlier. For the sake of this research, a bear market is defined as a stock market drop of 15 percent to 20 percent or more. Table 1 below provides some insight into the severity of the recent bear markets with an average loss for the DJIA of -23 percent from 1970 to 2005.

Table 1: Returns for the DJIA
Bear Mkt. Start Bear Mkt. End Length in Yrs. DJIA Losses
1/1973 10/1974 1.8 -36.0%
9/1976 3/1978 1.5 -23.0%
8/1987 10/1987 0.3 -22.0%
7/1990 10/1990 0.3 -16.0%
3/2000 10/2002 2.6 -17.0%

In examining Table 1, it is apparent that the above bear markets, with the exception of 1976 to 1978, experienced market lows during the “UPS” period May 1 to October 31.

Investors who follow market seasonality (as described in this article) may respond to Table 1 by saying that they did not experience the brunt of the financial pain indicated by Table 1 because they were either out of the market or had substantially reduced their positions during the unfavorable periods.

Table 2 below is offered in an effort to more closely examine hypothetical returns during the study period of 1970 to 2005 using a seasonal strategy. Table 2 assumes an initial investment of $10,000 starting January 1, 1970 and ending on December 31, 2005. It also assumes that the “DJIA Portfolio” was fully invested from November 1 to April 30, (FPS) in a money market (earning prevailing short-term rates) from May 1 to October 31, (UPS). The total return below for the (FPS) did not include short-term rate returns. They are shown in a separate column.

Table 2: Returns for Seasonal and Buy and Hold Strategies
Percent and Dollar Returns
$10,000 Start
Year DJIA Returns DJIA Returns Short Term Buy&Hold
“UPS” “FPS” Rate Return Returns
May 1 -Oct. 31 Nov. 1 -Apr. 30 During “UPS” (Annual)
Percent Dollars Percent Dollars Percent Dollars Percent Dollars
1970 2.7 10,270 24.6 12,460 4.1 10,410 4.8 10,480
1971 -10.9 9,151 13.7 14,167 2.8 10,701 6.1 11,119
1972 0.1 9,160 -3.6 13,657 2.5 10,969 14.6 12,742
1973 3.8 9,508 -12.5 11,950 4.7 11,485 -16.6 10,627
1974 -20.5 7,559 23.4 14,746 5.8 12,151 -27.6 7,694
1975 1.8 7,695 19.2 17,577 3.2 12,540 38.3 10,641
1976 -3.2 7,449 -3.9 16,891 2.8 12,891 17.9 12,546
1977 -11.7 6,577 2.3 17,279 2.9 13,265 -17.3 10,375
1978 -5.4 6,222 7.9 18,644 4.1 13,809 -3.1 10,054
1979 -4.6 5,936 0.2 18,681 5.6 14,582 4.2 10,476
1980 13.1 6,714 7.9 20,157 5.2 15,340 14.9 12,037
1981 -14.6 5,734 -0.5 20,056 8.7 16.675 -9.2 10,929
1982 16.9 6,703 23.6 24,789 6.1 17,692 19.6 13,071
1983 -0.1 6,696 -4.4 23,698 4.7 18,524 20.3 15,725
1984 3.1 6,903 4.2 24,693 5.7 19,580 -3.7 15,143
1985 9.2 7,538 29.8 32,051 4.0 20,363 27.7 19,338
1986 5.3 7,938 21.8 39,038 3.2 21,015 26.6 24,481
1987 -12.8 6,922 1.9 39,780 3.7 21,792 2.3 25,045
1988 5.7 7,317 12.6 44,792 4.0 22,664 11.8 28,000
1989 9.4 8,005 0.4 44,971 4.6 23,707 27.0 35,560
1990 -8.1 7,357 18.2 53,155 4.2 24,703 -4.3 34,031
1991 6.3 7,820 9.4 58,152 3.0 25,444 20.3 40,940
1992 -4.0 7,507 6.2 61,757 1.8 25,902 4.2 42,659
1993 7.4 8,063 0.03 61,775 1.6 26,316 13.7 48,503
1994 6.2 8,563 10.6 68,323 2.5 26,974 2.1 49,522
1995 10.0 9,419 17.1 80,006 3.0 27,783 33.5 66,112
1996 8.3 10,201 16.2 92,967 2.8 28,561 26.0 83,301
1997 6.2 10,833 21.8 113,234 2.9 29,390 22.6 102,127
1998 -5.5 10,237 25.6 142,221 2.8 30,213 16.1 118,569
1999 -0.5 10,186 0.04 142,278 2.7 31,029 25.2 148,449
2000 2.2 10,410 -2.2 139,149 3.4 32,084 -6.2 139,245
2001 -15.5 8,796 9.6 152,507 1.7 32,629 -7.1 129,359
2002 -15.6 7,424 1.0 154,032 .90 32,923 -16.8 107,626
2003 15.6 8,582 4.3 160,655 .55 33,104 23.3 132,703
2004 -2.7 8,350 1.4 162,905 .80 33,369 3.6 137,481
2005 1.8 9,051 9.3 178,055 1.8 33,970 -0.66 136,574
Total Returns -15.0% 1,681% 240% 1,266%

Upon examination of Table 2, it becomes apparent that seasonality in the stock market is obvious. By simply using the BHS, the DJIA returned 1,276 percent. This approach resulted in 11 losing years, ranging from -.66 percent (2005) to -27.6 percent (1974). The unfavorable seasonal strategy or UPS resulted in 16 losing years. The low to high range for the UPS was -0.1 percent (1983) to -20.5 percent (1974). The total return for the “Unfavorable Period” was a loss of -15.0 percent. The original $10,000 was reduced to only $8,501 by the end of 2005.

The “Favorable Period” (November 1 to April 30) had the best results. The total return for this strategy was 1,681 percent. The FPS was not only higher than the BHS, but it was invested in the market only half the time, thus reducing market risk. Even if taxes and transactions cost were included, the (FPS), when short term interest rate returns were added in, still appears to outperform the (BHS). Taxes would also have to come out of the (BHS) returns as well.

Reducing Risk Further

While the seasonality approach used above demonstrates that it is possible to actually cut the stock market exposure time in half and still outperform the traditionally touted Buy and Hold Approach espoused by many of the Wall Street pundits, a question remains: Could it be possible to reduce market risk exposure further and still increase returns?

Based on a previous study carried out by this author, an earlier strategy was modified and then incorporated in this study in an attempt to answer the foregoing question. This strategy is also seasonal. It is based on the notion that national politicians increase the “favorable rhetoric” before major elections. This rhetoric is often interpreted as having the potential to improve the macro economic environment, thereby growing corporate profits and increasing market results. Usually such a “campaign” often begins a year or two before a U.S. presidential election period.

For the purpose of this study, the year before the presidential election year was selected as the “prime” year to invest in the stock market. By incorporating what we call the 4-Year Cycle Strategy (4-YCS), an investor would only put up money once every four years! The rest of the time, as assumed earlier, the money would be safely invested in the money market at prevailing rates. (See “Presidential Elections and Stock Market Cycles“.)

This 4-YCS study, like earlier assumptions, began in 1970 and ended in 2005. Based on the concept of this strategy, if we begin with 1970, the first year before the presidential election would be 1971. Other years that follow are every fourth year thereafter, namely: 1975,1979,1983,1987,1991,1995,1999, and 2003. As previously mentioned, the other years not listed above would be earning prevailing money market rates during the study and would thus be insulated from the vagaries of stock market risk.

Table 3 demonstrates that the 4-YCS performed better than the returns seen using the FPS approach. The total return for the 4-YCS was 2,406 percent. This was considerably better than either the BHS or the FPS shown in Table 2. Finally, with 4-YCS, there were no losing years during the entire study period, and the DJIA portfolio, in which gross loss is hypothetically impossible, was earning money market returns for 27 out of 35 years.

Melding the two Strategies

While both seasonal strategies discussed above performed very well compared to the BHS, one might wonder if melding the two approaches would improve returns and reduce risk even further than is seen in Table 2. In an effort to answer this question, it was necessary to make the same time frame assumptions. In addition, it was decided to take the best of both seasonal strategies discussed above and meld them. Thus, this final study assumes that during the 1970 to 2005 period, all years embrace the FPS rules previously discussed, except those nine years that were designated as pre-presidential election years in the 4-YCS.

As the designated nine years appear in the final study, a fully invested position was assumed for the entire year in the DJIA (not just for the November 1 to April 30 period) as was done exclusively for the FPS strategy. Table 3 below provides us with the results of the 4-YCS and the Melded Strategy (MS). The asterisks that appear in Table 3 indicate the fully invested years used in the 4-YCS.

Table 3: 4-Year Cycle and Melded Strategy
Percent and Dollar Returns
Starting Value $10,000
Year 4-Year Cycle Strategy Returns Melded Strategy
Percent Dollars Percent Dollars
1970 7.84 10,784 24.6h 12,460
1971 6.11* 11,443 6.11* 13,221
1972 4.70 11,981 -3.6 12,745
1973 7.90 12,927 -12.5 11,152
1974 9.0 14,090 23.4 13,762
1975 38.3* 19,486 38.3* 19,033
1976 5.3 20,519 -3.9 18,291
1977 5.3 21,607 2.3 18,712
1978 7.2 23,163 7.9 20,190
1979 4.2* 24,136 4.2* 21,038
1980 12.7 27,201 7.9 22,700
1981 13.8 30,954 -0.5 22,587
1982 9.4 33,864 23.6 27,918
1983 20.3* 40,738 20.3* 33,585
1984 10.3 44,934 4.2 34,996
1985 7.3 48,214 29.8 45,425
1986 5.6 50,914 21.8 55,328
1987 2.3* 52,085 2.3* 56,601
1988 7.7 56,096 12.6 63,733
1989 8.4 60,808 0.4 63,988
1990 7.0 65,065 18.2 75,634
1991 20.3* 78,273 20.3* 90,988
1992 3.8 81,247 6.2 96,629
1993 3.1 83,766 0.03 96,919
1994 4.4 87,452 10.6 107,192
1995 33.5* 116,748 33.5* 143,101
1996 5.5 123,169 16.2 166,283
1997 5.3 129,697 21.8 202,533
1998 4.9 136,052 25.6 254,381
1999 25.2* 170,337 25.2* 318,485
2000 6.4 181,239 -2.2 311,478
2001 3.5 187,582 9.6 341,378
2002 1.6 190,583 1.0 344,792
2003 25.3* 238,800 25.3* 432,024
2004 1.5 242,382 1.4 438,072
2005 3.4 250,623 9.23 478,506
Total Returns 2,406% 4,685%

The final tallies revealed in Table 3 are quite interesting. The MS performed considerably better than did the 4-YCS. However, there were five losing years for the MS. The range of losses was as low as -0.05 percent for 1981 to a high of -12.5 percent in 1973. However, perhaps 1973 may be considered an anomaly since it was the period of an unprecedented OPEC oil embargo. Therefore if we were to exclude 1973, losses would be contained to -3.9 percent (1976) to -0.05 percent in 1981. These should be considered very benign losses considering the bear market declines shown in Table 1.


This study covers a 35-year period and contains strong and weak trending markets as well as major “melt-downs” in 1987 and 2000 to 2002. The two seasonal strategies, i.e. the Favorable Period Strategy (FPS) and the 4-Year Cycle Strategy were able to demonstrate that it could be possible to reduce market risk while investing less time and profiting more. For the entire study period, the Buy and Hold Strategy that is encouraged by many on Wall Street returned only 1,266 percent (using the DJIA as a measure), while the FPS, invested only six months per year, but returned 1,681 percent, excluding interest rate returns while out of the market.. However, the 4-YCS invested in the stock market only one year out of four, but gained 2,406 percent for the test period. The Buy and Hold Strategy had larger “drawdowns,” more losing years, and hence a higher risk than did the seasonal strategies. Finally, for the entire study period, the BHS experienced 69 percent winning years. The FPS experienced 82 percent winning years, while the 4-YCS had a 100 percent winning record.


This study not only demonstrates that it could be possible to reduce the time and risk associated with stock market investing, but that returns could also be significantly improved. The other interesting outcomes of the study are that the very difficult bear markets described in Table 1 were minimized or eliminated. In addition, the results associated with the recent stock market crashes of 1987 and 2000 to 2002 were practically eliminated, with the exception of a small loss in 2000 of -2.2 percent. In the final analysis, the Melded Strategy produced over 3-1/2 times the returns of the Buy and Hold Strategy, and with much less market risk!


Forecasting the future of the stock market is very difficult, but there are certain trends that develop over time that create patterns. Such trend developments prompted this study and ultimately provided some insight into future trends. Thus, based on the evidence provided in this study along with favorable economic conditions, including moderating interest rates and relatively strong corporate profits, there is a likelihood that the stock market will do well from the fall of 2006 to fall, 2007.

The year 2007 is one of those years that occurs one year before the year of the next U.S. presidential election in 2008. Citing the results of the 4-Year Cycle Strategy, we see that the average gain per trade for the last 35 years is 19.50 percent. Therefore, if for example the DJIA is currently at 11,689 (on 9/27/06), the DJIA could possibly experience an average increase (excluding any major negative global or national events) for example of 20 percent by the end of 2007. Such an increase would raise that average to approximately 14,027, which, if it happens, would be good news for investors!

The research included in this article was carried out for academic purposes and is not intended to be prescriptive or to encourage or discourage traditional approaches to personal investing. In addition, the data and analyses provided in this study are simply taken as a given and do not attempt to explain why certain trends develop in the market as they do.

[1] Sy Harding. Riding the Bear: How to Prosper in the Coming Bear Market, Adam Media Corporation, Holbrook, MA, 1999.

[2] In addition to Harding’s work see: Jonathan Laing, “Merry Month,” Barron’s, May 7, 2001 and Mark Vakkur, “Seasonality and the S&P’s 500,” Technical Analysis of Stocks & Commodities, vol. 14, no. 6, June 1996.

About the Author(s)

Marshall Nickles, EdD, has been instrumental in the development of Pepperdine's School of Business and Management. He has also been a consultant to several corporations such as Volkswagen of North America, 3M Corporation and Loctite Corporation. In addition, he has served as a board member to The China Economy Consultancy Co. in the People's Republic of China, The China American Technology Investment Group, vice president and board member of The American-China Association for Science and Technology Exchange, and advisory board member for Irwin Duskin Press. Dr. Nickles has also been a frequent presenter and discussant of professional papers at national and international academic associations. He has been a former financial columnist for The Orange County Business Journal and Business to Business Magazine. Prof. Nickles is the author of an economics text and more than 45 articles. Dr. Nickles has been quoted on television, and in several newspapers and magazines, such as The Wall Street Journal, USA Today, the New York Times, the Orange County Register, Barron’s Weekly, Stocks & Commodities Magazine, and the Los Angeles Times . He has been an invited guest on KNX 1070 radio, KTLA Channel 5, Fox Television, CNBC, and as the principal speaker at the national conference of the State Bureau of Statistics in Beijing, China. Prof. Nickles was the recipient of the Howard A. White distinguished teaching award at Pepperdine’s Graziadio School of Business and Management.



December 24, 2010 at 8:47 pm


Seasonality and the Stock Market
By Marshall Nickles, EdD
2006 Volume 9 Issue 4

Table 3:
Column: Melded Strategy Returns
Cell: Percent for Year 1970

Question please?
How was the figure representing Percent for Year 1970 derived?

Thanks, Mark


November 12, 2011 at 12:27 pm

Change the starting year from 1970 to 1980, things will be upside down.