Watching the weather on Wall Street

CHICAGO Mon Mar 24, 2014 2:16pm EDT

The Wall St. sign is seen outside the door to the New York Stock Exchange in New York's financial district February 4, 2014. REUTERS/Brendan McDermid

The Wall St. sign is seen outside the door to the New York Stock Exchange in New York's financial district February 4, 2014.

Credit: Reuters/Brendan McDermid

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CHICAGO (Reuters) - With the warming of spring, there's a natural tendency to think that stocks might warm up as well, despite less-than-sunny outlooks on interest rates from the Federal Reserve.

There is a documented weather pattern to Wall Street, which market watchers use as another indicator in their play books. But in this year of endless winter storms, the patterns have already been stood on their heads.

In positive years for stocks, January has typically seen rallies while February falters. Not so in 2014. The S&P 500 index dropped 3.5 percent in January, followed by a 4 percent rebound last month.

What's going to happen next? Winter and early spring months have typically shown positive returns for Wall Street. Since 1950, in the period from November through April there have 48 years with gains and 14 with losses. For the other half of the year, stocks rose in 37 years and lost in 25, according to The Stock Trader's Almanac, a publication that provides stock market analysis.

Late spring and summer traditionally are seen as periods of decline on Wall Street, something supported by research.

If this year tracks past seasonal patterns, the Stock Trader's Almanac predicts that the market will hit a top in "mid-April to early May before typical seasonal weakness begins."

Although historical average returns have generally been positive for stocks from 1926-2013 for every month except September, there's no reason to believe that this year will follow that pattern.

According to data compiled by BlackRock covering 1950 through 2011, there may be some significance in the old adage "sell in May and go away."

Stock returns from 1984 through 2011 showed the strongest returns in the early spring and fall, but a noted drop-off in the late spring and summer, with July being an exception.

The biggest average historic losses were seen in June and September. But the seasons may not matter this year if the economy and housing market continue to climb.

Based on current economic conditions, no analysts are talking about a bubble, although some are leaning toward the idea that stocks may be overvalued. The economy is slowly gaining ground, as evidenced by last week's slight uptick in the Index of Leading Economic Indicators, which rose 0.5 percent in February, according to the Conference Board.

RATIONAL VIEW

A more rational view for investors looking for signposts is to evaluate long-term risk for your own portfolio. The most troublesome aspect of crystal balling the stock market is that indicators always look backwards, and investors hope that the data predicts the future. It rarely does. Last month's stock prices may have no connection to next month's.

Even the Federal Reserve's pronouncements and an eventual rise in interest rates from their current ultra-low levels may not have a significant impact on stocks.

If you can afford to be in the market over decades and take the risk, then go long through broad market funds like the Vanguard Total Stock Market ETF, which captures the lion's share of all U.S. stocks and only charges 0.05 percent annually for management. The fund is up about 24 percent for the year through March 21.

Another alternative that could blunt some of the risk inherent with holding overpriced stocks is the PowerShares FTSE RAFI 1000 ETF, which is up 23 percent for the year through March 21. The fund charges 0.39 percent annually and tracks stocks that are selected for book value, cash flow, sales and dividends. It has beaten the S&P 500 index by 5 percentage points in annualized returns over the past five years through March 21.

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Editing by Beth Pinsker and Leslie Adler)

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