Will the US Stock Market Repeat its September Low, November High Pattern?

Seasonality refers to patterns that repeat annually, indicating a tendency for stock prices to rise or fall at specific times. A cycle, on the other hand, refers to a longer-term period lasting more than a year. Both concepts are crucial indicators used in stock market forecasting and investment strategy formulation.

An analysis of the S&P 500 index's monthly returns over the past 25 years shows that November has been the best month. Conversely, the latter half of September statistically shows a decline, tending to hit its annual low. This pattern was also evident in quarterly data, where returns between November and May tended to be higher than those between May and November.

This suggests that September is typically a period when factors negatively impacting the stock market converge, while November gains upward momentum due to the year-end shopping season and institutional investors' portfolio rebalancing.

Song Jae-kyung explained, "When we calculate the average daily trading over 20 days a month for the S&P 500 in the US over the past 25 years... the best month was November... and prices tended to sharply drop in the latter half of September, as shown by the average over the past 25 years."

US fund managers tend to take their summer vacations intensively until Labor Day. After returning from vacation, they tend to begin active trading and portfolio adjustments.

"The main holiday period for US fund managers is until Labor Day. ...When they return after Labor Day... they start active trading. So, there's a theory that they do a lot of portfolio reallocation," said Song Jae-kyung.

Another major reason for the September market weakness is that US mutual funds' fiscal year-ends are concentrated in September. Fund managers often employ a strategy called 'Tax-Loss Harvesting' in the closing month of their fiscal year to realize losses on holdings unlikely to recover, thereby reducing their tax burden.

This loss-realization selling by institutional investors tends to exert additional downward pressure on the market throughout September. Movements by large mutual funds, in particular, can significantly impact the overall market.

Song Jae-kyung explained, "The last month of the fiscal year is September. In the last month of September, if you have stocks that are showing losses and don't seem like they'll turn around, selling them now means those losses are realized."

Institutional loss-realization selling in September tends to lead to active re-buying starting in November. This is attributed to investors seeking new investment opportunities after receiving tax benefits. Individual investors also show increased interest in the stock market as consumer sentiment improves ahead of the year-end shopping season.

As institutional and individual investor trading patterns align, November statistically becomes a month of high returns. The six-month return from November to April tends to be better than from May to October, a phenomenon sometimes referred to as the 'Halloween Effect'.

Song Jae-kyung commented, "Isn't this why November has always had the best returns out of the 12 months? So, starting in November, there can be a feeling of a fresh start."

Since 2015, the US consumer sentiment index has shown an extreme divergence between Democratic and Republican supporters. A phenomenon is observed where the sentiment index moves in completely opposite directions depending on the current president's party affiliation. This suggests that the impact of political affiliation on economic sentiment has become significantly greater than in the past.

Such extreme sentiment indices can sometimes diverge from actual consumption patterns, a phenomenon known as 'Vibe Recession'. This means that people's perceived economic anxiety or optimism may not align with actual economic indicators.

Song Jae-kyung pointed out, "If you look since 2015, it slowly diverged and now they are completely separate. It varies greatly depending on who the current president is and which party they belong to."

Soft data, such as the Michigan Consumer Sentiment Index, which was considered important in the past, has recently seen its importance decline due to political bias. As extremely divided political affiliations are directly reflected in the index, confidence in its market predictive power has decreased.

Consequently, efforts to estimate consumer behavior using real-time daily and weekly data are expanding. The movement to analyze the market based on more objective and reliable data is gaining momentum.

Song Jae-kyung stated, "The Michigan Consumer Sentiment Index was incredibly important, but recently its influence isn't what it used to be. That's because it's become extremely biased on both sides."

In the United States, theme-based ETF products have emerged that invest solely in companies that make significant political donations to a specific party (Democrat or Republican). This is a result of the legality of lobbying activities and the widespread culture of political donations in the US.

These ETFs can be used by investors to align their investments with their political beliefs or to predict corporate performance based on ties to specific political factions.

Song Jae-kyung explained, "There's an idea to select companies that donate to the Republican party, since political donations are so prevalent in the US, and invest only in those companies. And there's also the idea to invest only in companies that donate to the Democratic party."

Concentrating investments in specific stocks can lead to greater volatility in returns, especially during times with many unpredictable external variables. Therefore, experts recommend portfolio (ETF) investment, which diversifies across multiple stocks, for risk management.

Portfolio investment helps reduce the impact of poor performance in individual stocks on overall investment returns, allowing for the pursuit of stable returns. ETFs are a good alternative for easily implementing such portfolio investments.

Song Jae-kyung suggested, "The easiest way is to simply buy a portfolio."

September, with its anticipated seasonal weakness, is a period requiring caution in investment. Oracle's debt and bond investor reactions, along with Adobe's earnings announcement, will be important indicators for the future direction of software stocks.

Song Jae-kyung expressed caution about September investments, stating, "There is never an easy market. So, it might be good to be careful in September."

Ahead of next week's FOMC (Federal Open Market Committee) meeting, the release of the PPI (Producer Price Index) and CPI (Consumer Price Index) further highlights the importance of interest rate and inflation indicators. These indicators can play a decisive role in increasing or easing market tension.

Interest rate volatility has significant repercussions in the bond market, so investors should closely monitor these indicators and market reactions until the FOMC next week.

Song Jae-kyung emphasized, "While these releases don't decide everything, you should watch whether market tension will heighten or ease ahead of the FOMC next week."

As former President Donald Trump faces political difficulties, US demands on South Korea regarding troop deployment, arms support for Ukraine, and semiconductor tariffs are increasing. This is interpreted as a reflection of Trump's political situation ahead of the US midterm elections.

South Korea needs a bipartisan response to these external pressures in the national interest. It is crucial to secure diplomatic flexibility and manage unique variables amid economic uncertainty.

Song Jae-kyung commented, "As Trump is driven into a corner, his demands on us have increased too much."

Concerns are being raised that excessive utilization of US Treasury General Account (TGA) funds could lead to adverse market effects. The debt ceiling is expected to be reached by the end of this year, which will clarify the limits of fiscal policy.

Economic experts like Druckenmiller and Summers are also advocating for a cautious approach to fiscal policy, drawing attention to the future direction of US economic policy.

Song Jae-kyung warned, "If they excessively use TGA funds, it will likely have adverse effects."