Seasonal Trend Points to an End-of-Year Stock Rally

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There are strong seasonal tendencies in markets I’m always watching as a trader. For example, we have the best six months of the stock market, which starts on November 1. Historically, that six-month period accounts for the majority of the market’s gain.

Some investors benefit from seasonal trends. Others argue that there’s no reason why some times of the year should be better than others. But those who dismiss seasonals are wrong. We have very real reasons for why seasonal trends happen.

Take a look at the chart below, which shows home prices. This is the seasonal trend in the S&P/Case-Shiller U.S. National Home Price Index.

As you can see by the sharper incline on the left side of the chart, most of the gains come early in the year before tapering off. The seasonal trend is weak in the last months of the year. And we have a logical explanation for why that is…

Seasonal Trend in the Housing Market

A lot of families move in the summer months. This allows them to relocate while school is out. To move in June or July, contracts need to be signed by April or May. Home sellers know this. They realize that if their home isn’t sold by May, they will need to cut their price.

Home sales slow late in the year. Again, this is related to family preferences. Many families want to be settled into a home for the holidays. They won’t want to sign a contract in September for October and risk even more chaos around the holidays.

This is good news for inflation. The cost of shelter accounts for 34.8% of the Consumer Price Index (CPI). If price growth in homes slows, inflation should also slow.

Now, inflation data is adjusted for seasonal trends like this. Bureau of Labor Statistics economists try to even out the gains in housing over the course of the year with their adjustments.

The trends, however, aren’t eliminated. The majority of gains in the official data set (CPI for All Urban Consumers: Housing in U.S. City Average) still come in the first months of the year. The data shows small gains at the end of the year.

Inflation Could Come Down Soon

Housing is just one component of CPI that has a robust seasonal trend worth following.

As with home prices, energy prices also show seasonal weakness at the end of the year. October and November are the weakest two months for oil prices. That could change this year, but history tells us to expect lower prices for gasoline and even heating oil.

That might be surprising since demand for heating oil rises in the winter. But suppliers already stocked up. Homes using heating oil are also already loaded in their winter supply. The time for the seasonal strength is in the summer when this demand is driving prices.

This is all good news for inflation. The largest components of the CPI are seasonally weak. This indicates that CPI could come down in the next few months.

With lower inflation, we should see lower interest rates — which is bullish for stocks. And that means a likely end-of-year rally lies ahead of us.

Regards,

Michael Carr's Signature
Michael Carr
Editor, Precision Profits

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