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The calendar should not matter – but it might

April 1, 2018 | Commentary

  • There is a long standing debate between traditional and behavioral economists as to how far from ideal markets really are. The traditionalists argue that in general there should be no simple trading rules that produce extraordinary returns. Behavioral economists argue that there are persistent psychological biases in humans that create such opportunities.
  • Few markets are as closely studied as the U.S. equity market. The general experience has been when “anomalies” have been identified in the market data, traders step in and any pattern disappears. This is what one expects when people learn through time and there are potentially great financial rewards for the quickest students.
  • Examining S&P 500 total monthly returns since 1950 suggests that where returns occur in the calendar may matter. If the year starts off on a positive note, as measured by performance across January and February, it seems the entire calendar year should be positive. Specifically, in the 68 years examined, there were 42 times where the first two months cumulatively were positive. Without exception those 42 years ended up with gains.
  • Investors may indeed be influenced by the psychology of a good trading start to the calendar year, but this result may just be the result of luck in a generally upward trending market. 2018 will again test this trading rule. Remember that past performance is most certainly not a guarantee of future results.

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