This can be seen in the average monthly changes in US share prices (using the S&P 500) shown in the next chart.

Source: Bloomberg, AMP

The key factor behind the seasonal pattern is the regular ebb and flow of investor demand for shares relative to their supply through the course of the year. 

In the US, AMP considers the principal drivers are: 

• Investors and funds selling losing stocks to realise tax losses (to offset against capital gains) towards the end of the US tax year in September. This is also normally when the volume of capital raisings is solid. 
• Investors are then buying back in the final quarter of the year at a time when capital raisings wind down into year-end.
• This combines with the tendency for investors to invest bonuses early in the New Year, as well as New Year optimism as investors refocus on the year ahead, put any disappointments behind them and downplay bad news all at a time when capital raisings are relatively low. Historically, the illiquid nature of investment markets around late December and January (due to holidays) has made these moves more marked.

Net effect of changes

The net effect, according to AMP analysis, has been that the US sharemarket has historically been relatively weak around the September quarter, has strengthened into the New Year and has then remained solid out to around May or July by which point New Year optimism tended to fade. 

Since 1985, November and April have been the strongest months for US shares with average monthly gains of 1.9% and 1.6% respectively, according to AMP analysis. This compares to an average monthly gain across all months of 0.83%. By contrast August and September have been the weakest months, as the chart above shows.

Consistent with the influence of US shares on global shares, this seasonal pattern is also discernible in other countries. The seasonal pattern for the Australian stock market is shown in the next chart. 

In the Australian market, April, July and December have tended to be the strongest months of the year, according to AMP analysis. 

Since 1985, Australian share price gains in April have averaged 2.4%, with July averaging 2% and December 1.9%, according to AMP analysis. This compares to an average monthly gain for all months of 0.62%. (Note that the lower average monthly gain for all months in Australia compared to the US partly reflects the fact that a greater proportion of the return from Australian shares comes from a higher dividend yield compared to the US.) [Editor’s Note: In 2023, the average dividend yield for Australian equities (S&P/ASX 200 Index) of 4.5% compared to an average 1.7% yield for US equities (S&P 500 Index). Source. S&P Global. Analysing High Dividend Yield Strategies in Australia. 2023].

Source: Bloomberg, AMP

In AMP’s view, in Australia, tax-loss selling could potentially explain the relative weakness often observed in May and June and the strength that has often been seen in July, given that the Australian tax year ends in June.
 

“Sell in May & go away, buy again on St Leger’s Day”

As a result of these monthly trends identified above, AMP's experience is that a typical pattern through the year has been for stocks to strengthen from around October/November until around May (or July in Australia’s case) of the next year and they have then tended to weaken into September. 

This seasonal pattern can be seen in the following chart which shows an index for US and Australian shares and the historical month-to-month pattern of share prices after the longer-term fundamentally driven trend has been removed. 

Source: Bloomberg, AMP

Breaking the year into two six-month periods also reflects this historic pattern. Since 1985, the average total return (i.e, from price gains and dividends) from US shares from end November to end May has been 90% more than from end May to end November. Globally and in Australia and Asia it has been three or more times bigger, according to AMP analysis.

Source: Bloomberg, AMP

While the US influence may play a role in the continuation of this seasonal pattern in shares, the old saying in its full form of “sell in May and go away, buy again on St Leger’s Day” has its origins in the UK as St Leger’s Day is a UK horse race in September. 

The saying may actually have its origins in crop cycles with grain merchants having to sell their shares at the end of the northern summer to buy the summer crop (which depresses shares around August/September) and they then bought back in after they sold the crop on to mills. Of course, that’s not so relevant today!
 

Have seasonal patterns weakened over time?

The next chart looks at whether the seasonal pattern has weakened in Australia over time by comparing the years 2000-2023 to the period 1985-1999. 

It looks like they have weakened a bit, with average gains in April, July and December falling in the more recent period. However they are still the strongest months of the year, and October looks stronger (mainly because the October 1987 share crash drops out of the data).  A broad seasonal pattern still remains with September being confirmed as the weakest month of the year on average. 

Source: Bloomberg, AMP

The next chart looks at the proportion of above-average returns in each month. Looking at the more recent period, April, July and December again stick out as having been stronger, with September tending to be weaker.

Source: Bloomberg, AMP

It’s not always reliable, but don’t ignore the time of the year

So, seasonal patterns have weakened slightly over time. Seasonal influences can also be overwhelmed when contrary fundamental influences [such as market or company factors] are strong, so they don’t apply in all years. 

Seasonal patterns certainly shouldn’t dominate an investor’s strategy. However, they nevertheless provide a reasonable guide to the monthly rhythm of markets that investors should ideally be aware of.