Seasonality, Correlation Without Causation and a Look Back at 2022

The holidays may have come and gone, but from a market standpoint, some argue they officially end Wednesday: the day that some who use seasonal adages deem the end of the traditional Santa Claus Rally period. Whether you use this definition (the week after Christmas plus the next year’s first two trading days) or the equally common “week before Christmas” marker, it seems safe to say we did not get one in 2022. All the more cruel, this was a year where every other seasonal adage “worked”: A down January predicted a down year, selling in May and going away may have carved out part of the decline (depending on your exact exit and re-entry points), and September had the worst decline. Now some argue the lack of a Santa Claus rally means weaker returns are in the offing from here. We don’t buy the logic.

There is a simple takeaway from 2022’s seasonality milestones: It was a bad year. There was a bear market. The S&P 500 peaked on the year’s first trading day, and global stocks followed a day later. Given that backdrop, it is no surprise that we now look back and see the negative seasonal adages seem prescient. Nor that the January effect “worked.” It isn’t because January is predictive, but because of the sheer coincidence of a bad January and a bear market. In all cases, it was a matter of correlation without causation. After all, seasonal adages work just often enough to keep the myths alive. If they failed repeatedly, then they wouldn’t be in the global investing consciousness anymore. People wouldn’t talk about them. Long-term average returns wouldn’t purport to prove them out. But under the hood, all those averages are made up of times when they worked and times when they didn’t. Whether it is the January Effect, Sell in May or September being the worst month, all fail more often than not. Frustratingly, 2022 was simply the rare year where no seasonal adage seems to have failed except the happy Santa Claus one.

In our view, that makes claims about Santa’s absence being predictive ring hollow. Quirky derivatives of seasonal adages aren’t any more predictive than the maxims themselves. In all cases, stocks don’t follow the calendar. If you accept that markets are at all efficient, then seasonality is incapable of being predictive. After all, is there anything on Earth more widely known than the calendar? And is anything more reliably trotted out in financial headlines, year after year, than seasonal saws? If markets discount widely known information, then seasonal adages have to be priced in. Just like all the other tools that are based on past returns and price levels, including valuations. Stocks see them, see what everyone says about them, and then do their own thing.

That doesn’t mean stocks always defy expectations. As Fisher Investments Founder and Executive Chairman Ken Fisher wrote in his 2015 book, Beat the Crowd, the consensus is right often enough to make things tricky for rote contrarian investors. That is part of why Ken calls the market The Great Humiliator. Everyone has to wear some egg on their face sometimes. But we also think it would be an error to do a philosophical 180 and start accepting all correlations as powerful, permanent and predictive. Causation matters. And if you can’t identify a fundamental, calendar-based reason that all the negative seasonal adages worked in 2022, then you must accept it as a humbling quirk and then move on.

So that is what we are doing. We will share our 2023 forecast in the coming days, but suffice it to say that it will be based on first principles, fundamental analysis and our core investment philosophy. It will stem from our analysis of economic and political drivers and how those square with sentiment and what we think markets have—and haven’t—already discounted. Not seasonality, interesting observations or whatever other trivia headlines might cook up.