What Is Seasonality?
In finance, the term seasonality is used to describe periodic trends in supply/demand, business performance and asset pricing. This phenomenon occurs consistently on an annual basis, in concert with regional weather patterns, economic data releases or the celebration of assorted holidays.
Seasonality is an important factor to consider when crafting investment decisions. If left unchecked, the enhanced volatility and market turbulence attributable to these trends can increase the risk of currency, equity or commodity market exposure.
Causes And Effects
Featuring a diverse array of underlying causes, seasonality has the ability to sway security valuations dramatically. In addition, the performance of sensitive service and manufacturing industries may also be significantly impacted. While not 100% foolproof, many trends in asset pricing show a strong correlation to specific weeks or months of each calendar year.
Primary Drivers Of Seasonality
The onset of spring, summer, fall or winter frequently prompts a shift in many facets of the financial world. From the planting or harvest of agricultural commodities to the energy demands of the travel industry, temperature and precipitation levels play key roles in seasonal trends.
The four divisions of the fiscal year feature unique market drivers that occur on an annual basis. Economic metrics such as gross domestic product (GDP) and corporate earnings releases are two examples of quarterly market drivers. Each is conducted in adherence to a predetermined schedule and is capable of spiking volatility in stocks and currencies.
The celebration of holidays is a common contributor to seasonal trends in pricing or performance. Each calendar year is populated with many holidays, depending upon regional and cultural affiliations. Consumption typically spikes during these periods, stemming from increased travel and luxury spending. Accordingly, the economic metrics facing annual holidays such as Christmas, New Year's, Spring Bank or Easter are used by analysts to measure economic strength.
Weather, fiscal quarter or holiday celebrations can bring about considerable economic shifts.
How Seasonality Impacts The World Of Finance
The relative value of currencies, equities and commodities often relies upon the time of year. For instance, the summer months (June-August) in the Northern Hemisphere are viewed as being the peak demand season for refined fuels. Subsequently, Reformulated Blendstock for Oxygenate Blending (RBOB) gasoline futures regularly experience an appreciation of value during March and April of each year.
Skewed Economic Data
Official reports and economic metrics are regularly skewed due to the effect of seasonality. As an illustration, the United States Census Bureau's Retail Sales report for December is a product of holiday season consumer spending. It is looked upon by traders and investors as a key U.S. economic indicator.
The lagging Retail Sales report of December 2018 is a prime example of this phenomenon. A surprise month-over-month decrease of 1.2% acted as a catalyst for an immediate sell-off in the U.S. stock indices, bringing an abundance of skepticism to the market. While the December 2018 data set turned out to be negative, an opposing scenario could have developed had the report shown robust monthly gains.
Increased participation is perhaps the greatest impact that seasonality has upon various markets. During specific times every year, select markets exhibit enhanced activity. This can have a measurable impact on asset values and the pricing of related securities.
It is important to remember that seasonal fluctuations in the marketplace are different from periodic trends in pricing. Securities and businesses sensitive to seasonality show consistent behaviour during specific months on a year-over-year basis. Conversely, short-term spikes in market volatility due to abnormal factors are not considered to be seasonal due to their "one-off" nature.
Seasonality In Action
In practice, it is difficult to find a market or asset class that is not at least in-part subject to the tenets of seasonality. No matter what you're trading, the weather, fiscal quarter or a timely holiday can influence market volatility and valuation models.
From futures to forex, many traders build strategies based upon observable seasonal trends. Below are a few of the more common tendencies:
The global energy markets exhibit a regular sensitivity to the changing weather. Crude oil, natural gas and refined products such as gasoline, diesel and heating oil all react to seasonal stimuli. For instance, the valuation of natural gas is relative to basic supply/demand pressures. Either the heat of summer or cold of winter regularly drive the prices of natural gas higher as consumer demand grows. In addition, the summer travel months in the Northern Hemisphere increase the consumption of refined fuels. Subsequently, rising crude oil prices are common from May to September.
Corporate stock valuations depend upon a number of factors, with time of year being among them. Quarterly earnings reports draw participation to the markets, frequently driving stock prices directionally. In addition, the U.S. Thanksgiving/Christmas/New Year's holiday season is credited with an uptick in American stocks. Known as the "Santa Claus Rally," this bullish price action has been good for an average gain of 1.3% since 1950, producing positive yields 75% of the years since 1969.
The planting, crop marketing and harvest seasons are credited with drawing increased participation to ag commodity markets. A result of both producer hedging and active speculation, the volatility of ag commodities typically spikes in concert with planting and harvest. For example, soybeans have a tendency to begin declining ahead of harvest time during July/August and continue to slump through February. From that point, prices begin to rally, typically reaching yearly highs during the summer months. Seasonal trends are evident across the ag commodity markets, including corn, wheat, live cattle and lean pork.
In contrast to commodities and stocks, the values of currencies are based upon the policies of central banks and domestic economic performance. Seasonal metrics and periodic monetary policy decisions can have a great impact on exchange rates. Quarterly releases such as GDP regularly stimulate forex volatility as traders evaluate a country's aggregate economic performance.
As with most things market-related, seasonality is not the "holy grail" of asset valuation models. While the aforementioned trends are common and statistically verifiable, they are not infallible. Forex, futures and equities markets are dynamic in nature, so a broad spectrum of factors influences evolving price action.
No matter if one is purchasing a home or scalping the EUR/USD, seasonality can have a significant impact on a transaction's outcome. When taken with the tenets of fundamental and technical analysis, the recognition of these tendencies is an important part of crafting strong financial decisions.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…