The Factory Daily Letter

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July is a winning month for equities

While for other assets the seasonal picture is more mixed

In terms of the seasonal market trends, July has proven to be one of the strongest (if not the best) months historically for market performance, especially US Equities (in a trend that holds irrespective of the performance to June). However, not all asset classes enjoy such a positive trend, with July marking the start of the worst seasonal window for the US dollar and small-cap stocks.

The seasonal trends for equities

On market data going back to 1928, the S&P 500 sports an average return of +1.6% for the month of July, making it the strongest month of the year for US equities on a seasonal basis:

 

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

The picture is a little less shiny however when we take a closer look at the data: only 60% of the 94 July returns recorded have been positive, putting the month of July down in sixth place (joint with October) on this basis:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

If we limit our study to data going back to 1990 however, there are two clear take-aways:

  • While November, April, December and October do better, July remains among the top contenders with an average return of +1.2%;
  •  July appears to represent a month of ‘relief’ within the bearish window that runs from from June to September.
Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

Moreover, since the Great Financial Crisis, not only has July proven the best month by far, but its reputation as a ‘rebound’ month in the subdued summer period is also confirmed:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

And July also remains comfortably in the lead from a statistical point of view with 85% data points positive:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

With the month of July only negative in two of the past 13 years (since the GFC), we are also currently seeing a positive streak over the past seven:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

How does the story change according to YTD performance?

On data going back to 1990, other than instances where equity market performance through June has been worse than -5%, the month of July holds its reputation as a ‘rebound’ month. Where YTD performance has been positive, markets tend to continue on their positive trajectory in the month of July, and tend to rebound when negative YTD in a pattern that is also evident across data going back to 1928.

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.
Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

The same is nicely illustrated below in a chart which shows historical average performance across the month of July according to a variety of different YTD scenarios on data going back to 1990 – all time series in positive territory at the end of the month:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

So what of the sector story?

In the bar chart below we present seasonal historical average sector returns for the month of July, YTD (though June) in pink; and the average difference between seasonal performance in July and June. The clear message is that July beats June across the board (with the exception of telecoms), with real-estate enjoying the strongest seasonalityé while energy is a laggard (as tallies with the end of the bullish period for energy that we discussed in last months’ letter on spring seasonality – see it again here).

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

What about the other asset classes?

While the story for equities in July is a simple positive one, the picture across other assets is mixed. While June is also the best month of the year for bonds (using the 10-year US Treasury yield as a proxy); we see oil cool (between two ‘bullish’ periods) while the US dollar and small-cap names enter a bearish period that runs until September:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

While July appears to be a better month than June also for Gold, it is not the case for US dollar and small-cap names:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

The case of crude oil

As alluded to above, the seasonal tailwinds for oil tend to fade at the end of June, before picking up again between August and September:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

The US dollar

The US dollar is entering a seasonally poor period on account of its tendency to rise during the first half of the year and then fade into the second half of the year (the worst period being that between July and September):

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

Small caps

US small caps make for an interesting case as this year they have diverged significantly from their seasonal performance patterns, as we enter what is traditionally a weak month for the index:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

Playing seasonality – is there anything in it?

While (as we are frequently reminded) past performance is no indicator of future returns, some strong and “reliable” patterns nonetheless exist over different asset classes and over different time ranges. We have carried out a backtest using point-in-time data, and built two theoretical long-only portfolios of the 20 seasonal best/worst within the S&P500. They are equally-weighted, rebalanced monthly and we use median monthly returns over the past 20 years to determine the seasonality factor (so each stock at the inclusion date must have at least 20 years of price history). The cumulative returns of these two theoretical portfolios, along with the S&P 500 Index, are presented below.

This shows that after more than 12 years, the return of the “best seasonality” portfolio is almost twice that of the “worst” (+716% vs +371%) while the performance of the S&P 500 over the same period has been +348%. This implies that seasonality factors have over the longer-term proven to ‘work’ – particularly on the long side:

Source: FactSet; Pictet Trading Strategy; as of 30/6/2022.

Seasonal stock screenings: July’s winners and losers

US Best / Worst

In the tables below we present the US stocks (S&P500) with the best/worst combination of positive occurrences and average returns in July, ranked by descending/ascending median return and screened with our quantitative grades:

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 30/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a
Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 30/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a

EU Best / Worst

In the tables below we present European stocks (Stoxx Europe 600) with the best/worst combination of positive occurrences and average returns in July, ranked by descending/ascending median return and screened with our quantitative grades:

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 30/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a
Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 30/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a

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