How is November treating you?

With the US share market closed for Thanksgiving it is a good opportunity to reflect on the returns of the $S&P 500(.SPX)$ month and year to date and exam what may lie ahead. 2022 has been a difficult year for stocks with the $S&P 500(.SPX)$ falling 27.5% from its January intraday high of 4,818 to an intraday low of 3,491 in mid-October.

From this October low the market has rallied 15.6% to 4,034 on Wednesday.

So, will this bear market rally succeed where others (January, March, May and June) have failed this year?  Time will tell!

Mid Term Election Effect

What we do know is that historically stocks tend to sell off in the two quarters ahead of midterm elections and that they tend to bounce higher in the two quarters after the midterm elections.  A recent article in Forbes included the following graph that highlights the negative returns in the Q2 and Q3 prior to midterms and then a bounce.  And yes, this pattern is being exhibited at the moment.

Other historical patterns include:

1. the best months to buy stock over the last 40 years, from 1980 to 2020,

2. Santa Claus rally.

Best months to buy stocks

The table below shows the average % change per month between 1980 and 2020 and shows that the best months for stocks have been April +1.97%, October +1.13%, November +1.55% & December +1.22% (and yes this includes October 1987 and October 2007).

September is typically the worst month for stock market declines with September averaging a -0.52% loss over the last 40 years.

Santa Claus Rally

Many market pundits further describe a rally in market returns from Thanksgiving to the second trading day on the New Year.  This definitely occurred at the end of the spectacular bull run that finished at the start of this year on January 3, 2022.  As an example, a recent article by Options Strategist - Lawrence McMillan states that:

There are actually three different positive (bullish) seasonal systems that occur between Thanksgiving and the start of the new year. In short, they are:

 1) the post-Thanksgiving rally,

2) the “January effect,” and

3) the “Santa Claus rally.”

These encompass the entire period between the close of trading on the day before Thanksgiving through the second trading day of the New Year. Moreover, small caps stocks ($IWM(IWM)$ ) normally outperform large-cap ($SPDR S&P 500 ETF Trust(SPY)$ ) stocks over that time frame.

The following table from the Traders Almanac show the returns of the $S&P 500(.SPX)$ from 1950 to 2021 with an average return of 2.65% and the Russell 2000 from 1979 to 2021 with an average return of 3.38%.

Moving away from these Technical Analysis factors, other interesting fundamental factors that may generate buying interest are:

1. Decline in short interest.

2. Declining dominance of FAANG stocks as a ratio of market cap in the $S&P 500(.SPX)$

3. Declining PE ratios

4. Convergence of index PE ratio’s

The following chart highlights the decline in S&P 500 short interest as a percentage of total market capitalisation of the $S&P 500(.SPX)$ that peaked at over 25% in mid-September to just under 17% on Wednesday 23, November.

Source: Tiger Trade

The distribution of capital amongst the $S&P 500(.SPX)$ is realigning and the FAANG and Tesla stock dominance of the index is arguably declining. 

Source: Tiger Trade

The following table shows the YTD returns of the 12 sectors of the $S&P 500(.SPX)$ stocks to 23 November 2002

 The P/E Ratios of $S&P 500(.SPX)$ companies have declined to a more realistic/palatable 21% compared to 26% at the beginning of the year and 36% at the start of 2021.

Source: Tiger Trade

The P/E ratio of the Nasdaq stocks has also declined relative to converge with the P/E of  $S&P 500(.SPX)$ stocks. 

Source: Tiger Trade