That time of year is finally upon us—commonly in the middle of November—when, in addition to witness premature Christmas decorations, there will be people signaling that this winter will be harsher.
These people usually base their forecasts on an isolated and anticipated observation: “If the weather is this cold right now, you can figure out how it will be in January.” Although global warming is behind more extreme seasonal changes, I attribute these assertions to two factors: the one who makes the observation is not properly dressed (prepared) and its parameter to judge was the experienced change regarding the recent weather (momentum), instead of last November’s weather.
I believe that investors, globally, can empathize: the market’s recent performance posted a sudden change against its upward trend, catching a lot of investors off guard without wearing their winter coats.
Sometimes, it has been commented about the market cycles, which have longer horizons than the seasons. These cycles cover periods of five to ten years, compared to the four months of the seasons.
It is important to be aware that not every day will be sunny and it is well worth that our portfolio is prepared for various environments, such as rainy days, snowfalls, low tides, etc
I’ll say it once and I’ll say it again: the best tools of the investor to get around the different scenarios are time and diversification. Having a diversified investment strategy, according to the time horizon, is having more than half of the fight won, period.
These draw downs usually come unadvertised and the advisable thing is to deal with them, wisely. I do not mean that you should capitulate to fear and rush to close your positions. You should dedicate time and attention to analyze your long-term perspective and, based on this, define your next steps.
If a deeper fall does not materialize in the short term, it would have been useless to sell your positions giving in to the panic. However, if you consider that your current position is vulnerable, you could take advantage and make an orderly rebalancing in your portfolio that aligns with your updated strategy, I repeat “orderly”.
Even though people associate winter with a dark period, the reality is that, when someone is well prepared, harshness can be avoided and it can be a really fun season. Moreover, there are people who do recreational activities and end up getting the most out of it.
An analogy could be to short sell, a scenario where investors take advantage of a downward trend to profit when stock prices fall. Remember that short selling also follows the maxim of buying low and selling high; only that, in these cases, we begin by selling high an asset that we will look for to buy cheaper in the future. As for most winter sports, this is an activity for which it is recommended to take the necessary precautions and safety measures.
In other issues related to the period between the months of November and December in the stock market, there is the belief of the so-called Santa’s Rally. For years, investors have argued that the period between Thanksgiving and New Year is characterized by good performance.
As a reference, analyzing information from the last 50 years in the S&P index, this period, in effect, is the bimester that presents the highest recurrence in positive returns (75 percent of the time). Likewise, it is the period that shows the highest average return with 2.73 percent, followed by the two-month period of March and April.