Alpha Power Investing Newsletter

February 1, 2019

Seasonality in the International Stock Market

A Worldwide Phenomenon
Many investors are familiar with the phrase "Sell in May and Go Away". To most investors this phrase refers to a commonly known tendency for the U.S. stock market to perform better during one part of the year versus the other part of the year. As it turns out - and as the numbers will demonstrate - this phrase is based in fact. However, investors should be aware that this trend is not just a "U.S. thing". In fact, it is a worldwide phenomenon. To illustrate this point, we will highlight the performance of one broad international index that excludes the U.S. domestic stock market in order put a spotlight on the consistency of this trend around the globe.

International Index Focus: MSCI EAFE Index
The MSCI EAFE Index is an equity index designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East (hence the acronym EAFE), excluding the U.S. and Canada. The EAFE Index was created by Morgan Stanley Capital International (MSCI) and includes stocks from a number of regions, market segments/sizes and comprises approximately 85% of the free float-adjusted market capitalization in each of the 21 countries.

All results presented below are based on index data returns and do not represent actual trading. The data used is monthly total return data culled from the PEP database from Callan Associates.

Long-Term Buy-and-Hold History
As a baseline, note that Figure 1 displays the growth of $1,000 invested in the MSCI EAFE Index starting on October 31, 1972 and held continuously through October 31, 2018.

As you can see in Figure 1, there was significant growth of capital over time. However, there was also a tremendous amount of volatility along the way, including four separate drawdowns in excess of -30%.

International Power Zone vs. International Dead Zone
For this test, we will compare the results of investing $1,000 in the International Power Zone vs. the International Dead Zone over the past 46 years. Please note the following:

  • The International Power Zone extends from November 1 of each year through April 30 of the following year.
  • The International Dead Zone extends from May 1 through October 31 of each year.

Figure 2 displays the growth of $1,000 invested in the MSCI EAFE Index ONLY during the months of November through April, beginning November 1, 1972 through April 30, 2018.

Figure 3 displays the growth of $1,000 invested in the MSCI EAFE Index ONLY during the months of May through October of each year, beginning May 1, 1972 through October 31, 2018.

In Figure 2, note the relatively smooth and consistent growth of capital during the Power Zone months compared to the much more volatile and highly inconsistent returns during the Dead Zone months presented in Figure 3.

Results: Power Zone vs. Dead Zone
Figure 4 displays several key comparative performance measures for the MSCI EAFE Index during the International Power Zone versus the International Dead Zone.

Key Things to Note
1. International stocks have historically performed vastly better during the Power Zone months, generating both significantly higher returns and more consistent returns.
2. The MSCI EAFE Index held ONLY during the months of November through April every year produced a net gain over all five-year rolling periods (i.e., 100% of the time). This is the type of consistency that investors should look for.

The Optimism Cycle: Why Seasonality Works
In a 2005 white paper titled "The Optimism Cycle: Sell in May", analyst Ronald Doeswijk identified what he referred to as "The Optimism Cycle" as the basis for this seasonal phenomenon in the stock market. Based on the theory that people are optimistic by nature and tend to overestimate the likelihood of good things happening more than bad things, the optimism cycle assumes that the perceived outlook for the economy and earnings varies during the year. In the last quarter of the year, investors start looking forward to the next calendar year. At first they are usually too optimistic about the economic outlook and this optimism results in enough buying pressure to initially generate attractive returns on stocks. However, several months into the year, reality catches up with them, they become more pessimistic, buying pressure dries up and the stock market experiences a summer lull.

Historical stock market price action clearly seems to bear this theory out, not only in the U.S. but in countries around the globe. The Optimism Cycle has demonstrated itself to be one of the most consistent, persistent and pervasive market trends available to investors.

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.
877-229-9400
www.alphaim.net
info@alphaim.net

Disclosures and Disclaimers: Past performance is not a guarantee of future performance. The returns illustrated in the charts above do not represent actual trading and is not representative of any Alpha Investment Management strategy. The data does not include management fees or the cost of funds, trading, or other expenses. The illustrations are designed to quantify the effect of certain time periods (as specified) on the MSCI EAFE Index. Indexes are not investment vehicles and persons cannot invest directly in an index. The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries. Developed Markets countries in the MSCI EAFE Index include: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

The data used to construct the illustrations was obtained from third-party sources. While Alpha believes the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  

Alpha Investment Management, Inc. is a SEC registered investment advisor. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

© 2019 Alpha Investment Management, Inc.

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