What is seasonality and how to use it when investing

Everyone on Wall Street has heard the mantra "sell in May and go away." It's just one example of seasonality that traders discuss on a yearly basis.

In this episode of Stocks In Translation, Yahoo Finance markets and data editor Jared Blikre examines "seasonality" —the predictable and recurring patterns in data that occur each year.

Joined by Yahoo Finance's Sydnee Fried and Carson Group's Chief Market Strategist Ryan Detrick, Blikre dives into the recent spike in the VIX Volatility Index and small-cap stocks. Detrick also shares what better productivity means for the economy, offers insights for new investors, and advises on navigating stock volatility based on his extensive experience in the industry, working with financial advisers.

For more expert insight and the latest market action, click here.

Find this episode's transcripts and more episodes of Stocks in Translation at https://finance.yahoo.com/videos/series/stocks-in-translation

This post was written by John Tejada.

Video Transcript

Welcome to stocks and translation.

Our essential conversation cutting through the market, mayhem, the noisy numbers and the hyperbole to give you the information you need for your portfolio.

And today I'm joined by my sidekick Sydney Fried and Ryan Dietrich making a special trip to New York.

I think uh hailing from Ohio, uh the sultan of seasonality.

Bold boss, Ryan Dietrich is here from the Carson uh group chief market strategist there and welcome guys.

Today we're gonna be talking about guess what the global risk roller coaster that we all seem to be riding on.

And our phrase of the day is seasonality, of course, perfect for you Ryan.

And this episode brought to you by the number 86.

That is the percent time the Russell 2000 index is positive one year following a five day 10% thrust.

The likes of which we just saw and we'll get into all those wonky details in a second.

But Sid Ryan, let me, let me get Ryan your, your thoughts on the big picture market.

We've had this terrible upset in the risk markets with the Japanese Yen going nuts.

What do you make of this?

First of all, thanks for having me guys.

This is going to be fun.

I'm looking forward to this, um, flew in this morning and I'm here.

Nice and it's raining in your city though.

You get a 74 degree day.

That's actually a celebrate.

I was here two months ago.

It was, I was melting.

But nonetheless, you know, you think about this year, I mean, it's an election year.

Yes.

We had the best start to any election year since 1976 middle of the year.

And then here comes August.

We get in the seasonality part of it.

August sometimes gets these rare events.

You know, we've only got the air quotes here, only had about 8.5% you know, mild correction so far.

Now most years see three more than 3 5% Pullbacks a year.

You see a 10% on average.

I mean, our take, we get into the details of this.

We still do not see recession.

We still think it's a bull market.

The headlines are scary.

Absolutely.

But you know what, most years have scary headlines and scary Pullbacks.

So we're so optimistic that, um, once we get through this rough patch, which could be sooner than later, we, we'll still have some pretty good gains left.

Jared.

You have been remarkably consistent in your call for no recession since last year.

That was when it started not to come.

And we want to get to our word of the day here, seasonality because that kind of plays into our discussion, seasonality refers to the predictable and recurring changes in data that happen at the same period every year.

So, you know, can take, we got, we were just talking before the show, we got S and P 500 data back to 1928 before the S and P 500 existed.

So to speak of wrap your head around that.

But nevertheless, you know, you can look, you can parse the data any number of ways, but sometimes there are some clear trends and tell me how you use seasonality in your work.

Yeah, we would never blindly just invest in seasonality.

But I'll tell you, it is really amazing when you look at some of these seasonal trends.

You know, I mean, listen, let's talk about August for a second here.

August historically, when August is down, it tends to really be down like more than any other month.

In 1990 Iraq invades Kuwait 97 the Asian contagion 98 Russian ruble or Russian default led to the long term capital management implosion 2007, 2000.

That 2011, we had the um the the debt downgrade 2015, the Chinese wan devaluation and here we are now with another currency around the globe.

And you know, listen, is it random?

Is it not, I, I don't know, I mean, but the reality is light volume.

People are away in August, you get these, these big news events and looking back all those months we just mentioned were very big doubt months across the board.

No question, people say crash and they think October, but August is a real killer too when it's down.

It really is.

That is exactly right.

And obviously we've had one of the worst starts to in August ever kind of bouncing back a little bit.

But I think that's, uh, that's one way to look at it that you get these little lose with seasonality.

Um, you know, just this year coming into this year.

All right, the last 10 times you had a president up for re-election.

Now, I know where you're going.

Next question, where we're going with this.

But when the president for election Mark's been hired the last 10 times, right.

Mark is doing just fine and then we got some drama out of Washington.

You could say that's kind of in, in the, uh, in the, in the soup, so to speak and kind of why we're having a potentially a little volatility.

But I think to answer your question, I think it's all about the end.

I know people think the economy's slow when we get into that.

It is parts of it.

Um, you know, the fed behind the eight ball.

Yeah, I agree.

I think they are.

But let's not forget we rallied last Wednesday when the fed did its thing.

Market was ok. No one has more cuts coming.

Um, the reality is the yen is the thing or the Japanese, uh Boj really upset the Apple cart without hike.

Apparently nobody expected.

And then here we go.

Well, so backing up a little bit.

Is it that August can be a little wonky, you know, from my perspective, just because it's, you know, we're most of the, we're almost most the way through the year.

We're kind of closing in on the start of the third quarter shortly.

Uh Is there an event that precipitates something like this or is it just that it's the end of summer and people start doing weird things?

I think, well, a little combination of all those really, I mean, I think a lot of it does volume is usually light.

I mean, you look at, I mean, what were we just dealing with before all this start?

I know it was in July.

But I mean, or let's say about June just for a second here, the worst day in June, remember what it was down, 0.41% 41 basis points on the S and P the worst day.

All of June.

OK. And a good chunk of July was like watching paint dry as well.

So you kind of can have that.

And then boom, we've seen throughout history when periods get slow, there's volatility, then you get a lot of volatility.

People things get slow.

So I think with that low volume people, I mean, just on our team, I mean, a lot of people are on vacation the last week or two.

It was like, oh, my, I think a lot of people, I heard j own pals on vacation this week, like, maybe he's working from home.

We Jackson is coming a little early.

You better believe it.

So, anyway, um, you know, I just think it's, it's kind of all those things together really.

It's just good to know.

I think it's a good context to know.

Yeah.

And then following on that, what do you typically see in an election year?

Yeah.

Well, again, it's, it's two sided if you will, um, you know, election year on average up about 7%.

Um, but when, again, when you had historically, you've had a president up for re-election.

Again, I'm aware happening right now.

You tend to get a strong second half of the year.

It's those lame duck years, 19 62,000, um, 2008.

Now there's some big things happened in 4008.

That kind of skew those numbers, but that's just something to be aware of.

Um, and, and that's something we were, we were, we've been talking about, um, um, a lot and then you also look at elections, what do markets hate uncertainty as most listeners probably know.

And then you tend to get what you really tend to get in most election years.

Is this sell off ahead of the election?

Ok. Just the last two elections.

What do we see?

2016, 2020.

Good time.

Good weakness ahead of it.

Then the uncertainties, um, you know, over, once that election's over, then you get that upward bias.

And I, I mean, we said a month ago if we would have done this, I'd say, you know, we'd be foolish to think we're only gonna have 1 5% correction all year.

That's what we had earlier this year.

Um, ahead of an election, you're probably gonna have more volatility and I know this volatility again is because of what's going on probably with the boj nonetheless.

Um You know, that's what you tend to see.

So we could have, I think we're in the, we can talk about the vic's volatility.

There's a lot of cool stuff going on there, but I think we're trying to carve out a low, but I mean, be low is in play and just know September in an election year is not all that great.

So I wouldn't be shocked at all if we had more scary headlines with that election around the corner.

Let's talk about the data for a second.

Um Data is actually not that bad and, you know, you could knock, we had a slightly disappointing payrolls report last week.

You can knock off, uh part you can blame part of that on the weather, but also I'm looking at defaults, credit card defaults, those, those are running the right way those are going down.

And so I'm just wondering, you know, you haven't seen recession, talk to me about the data, maybe the potential for an upswing here, maybe that's the issue.

Well, that's our case.

Right.

We don't think there's a recession.

You mentioned the faults are going down.

Look at the, you know, the, um, how many people are getting laid off?

Right.

It's layoffs are not spiking at all.

I mean, usually you see layoff spiking if there's a recession claims, pretty muted, jobless claims.

Well, we had a little bit of a spike but again, um, you know, a lot of that potentially was what we just saw in Texas, right?

I mean, Texas had a huge spike in initial jobless claims because of the storm.

So, so we're watching that.

But, but again, you know, a lot of the consumer data, there's some cracks.

Yes.

But again, it's not, not over the top.

I mean, you think about market peaks, it's usually at excesses, right?

I mean, yes, credit card debts, quote unquote an all time high over a trillion dollars.

But so is net wealth, net wealth is up exponentially even more.

So we, we call this denominator this, yeah, you know, numerators up but denominator net wealth.

If you own a house, you own, own, own, um, a house with some stocks the last 10 years, you're probably worth a lot more.

And then the other big, um, thing we hear all the time is, well, inflation's up a lot and it's really hurting and there's no question, inflation's up a lot.

Since before COVID, the, um, the core PC is about 19%.

20% is not nothing.

Well, it's not nothing.

But then you look at wages, you look at compensation of 25 and 26% on the whole and you know, whose wages are up even more, the lower 50%.

So I'm not saying things are out there, but there are some real positive, Jared when we, when we look at it that we say this is over, overblown.

One more comment.

You know, we, we all freaked out.

We all not me, but a lot of people freaked out, right.

Everyone freaked out when we had that manufacturing data last week from, um, you know, 300 purchasing managers that said they're not hiring and everyone got all worked up about it and then the jobs data came in a little wonky also.

You know, again, I think we, we're that you can say there's probably some weird things going on with the, with the weather last week.

Um, but last month, but the reality services number just came in yesterday and the service is really strong employment, new orders, business activity that makes up a huge part of the economy versus the 10 or 11% for manufacturer not ignoring manufacturing but it's like, let's, let's take the full picture here, talk to us a little bit about the moves we're seeing in the vics this week on that because that massive massive swing up I'm seeing right now down and a half percent.

Although I'm told that is the wrong way to say it.

So can you, can you also explain a bit about that?

Well, sure.

So, I mean, it's like a joke I guess we use on, on social media.

Some people on X take it very seriously.

I took it seriously when I saw your tweet.

Well, you know, so you can look at the really the vic should be looked at in terms of points.

So I didn't move five points, 10 points because when it's low, like it was recently, you can have a very big percentage move and it's not really telling the same story.

Oh the vic is up 100%.

I mean, that's a big move but again from 10 to 20 is not the same as from 20 to 60 when you talk about volatility now to get to the vics.

This is the last three days, previous, three days, first time in history.

Going back to at least 1990 we had a Vicks close beneath 30 go above 60 day the next day and close beneath 30 that third day.

That's never if you watch it.

If you watch it, you just have to laugh when you see that because it's just ridiculous.

It really is.

So, we have it even useful anymore.

Well, that's a good question there.

Um, we haven't had a 10% and we got a VX over 61 of the highest levels you've ever seen.

Now here is again on the points basis.

Yesterday, the Vick closed down 10%.

That's on a closing basis.

Closed down 10%.

That's a huge drop, an implosion of volatility.

What's that?

Tell us?

Well, historically, that's really rare.

All right, I'm talking like, you know, after the flash crash after us debt downgrade in March of 2020 the only three times we've seen the last three times, we've seen a 10 point drop in one day, one year later, higher every time after that.

And lows were pretty much formed up over 27% on average, not saying it's gonna happen again.

But when volatility implodes, it's kind of the market's way of saying we're trying to carve out that low.

And it is fascinating at the time we're doing this, Vick is 23.

You know, if you just took off last week, you would have never had any.

Imagine if you all do the VICS where it was 2323 off, nothing happened.

Well, not so much Mr Seasonality, plying your trade on the vic.

I love it vic seasonality.

All right.

We um we need to take a short break here coming up.

We're going to take a look at small caps looking for some sunshine.

And we're also gonna talk more about the vics which could shed a few pounds.

We stir things up with a volatile who wore it better up next.

We are back and our sponsor is calling it is the number 86.

We recently had the Russell 2000.

That's a small cap index surge five straight days up over 10%.

And this was before the nasty sell off.

We had this week.

So little context there, Ryan, you recently calculated what the Russell 2000 looks like like a month later, three months, six months, 12 months when it has that big 10% move uh in five days, it's up 86% of the time.

That's our number right there with a median gain of 19%.

The average is 27% pretty high, not quite as bullish on the shorter time frames, only 57% positive a month out.

But I think that would be welcome news for people who are staring at the short term technicals in the Russell, which is not looking great right now.

We had that, that break to the upside and we're back in this three year range.

It just doesn't look good.

It, it's kind of like Lucy and Charlie Brown on the football.

That's what it feels like the football back and we've had an overweight to small and mid caps for the majority of this year.

Now midcaps have done a lot better than small, but nonetheless, focusing on small, our big thesis has been inflation is last year's problem.

There's going to be some fed cuts coming.

And, you know, we didn't see a recession and we saw that huge spike after CP I, you know, a few weeks ago came in better than expected.

And that's, that's what sparked that, that big five day we call a buying thrust.

And again, historically, those buying thrusts are, are kind of, they show a change in trend or maybe an acceleration of the trend.

If the trend is already bullish and the bottom line again is it tends to be bullish.

I mean, small caps really are historically cheap relative to large.

You know, there's, if you look at earnings growth this earnings season, you know, it's ok. And some of the large tech and A I have been a little disappointing, but small cap earnings have been solid.

You look at next year, small cap earnings are expected to grow more than large caps.

And we think that's very possible again with an economy that probably avoids the recession.

So there are some drivers there and I get it, it's, it's, you know, kind of a dirty word to say small caps because it frustrated people.

Let's not forget the Russell two gained 27 or 20 either 24 or 27%.

I forget the exact number but close enough for government work.

The last two months, last year.

That was the third best two month rally ever.

I looked at the 10 largest two month rallies ever.

A year later.

You're talking up close to 30% on average, higher, like eight out of 10.

My take small caps at a huge end of year rally went sideways for six months.

Now, potentially they're starting to get going again.

And I, I'm aware of the, you know, the rug poll that we just saw.

But I mean, you know, I was starting to believe here, I appreciate this.

Does it matter if small caps are the leader or not?

Oh, good question.

Yeah, it really listen, I guess it depends how your portfolio is.

If you're all in, all in large caps, you wouldn't like that.

But I, we answer your question.

Yes.

We, we like to see other groups participating.

This is just those big seven names, just technologies, communication, services.

And to see that like the e I know Jared, you look at stuff all the time, those equal weights, right?

The equal weights are finally starting again to do well, because again, we know the large names in the tech haven't done quite as well.

So to see some participation across the board, we like now I mentioned we like small, we also, we also like financials and industrials, you know, on Sunday night when we were promised to crash um by a lot of people, you know, as of the middle of this week.

On Wednesday, the Industrials and Financials actually up on the week, you know, I mean, that's kind of amazing when you look at the and that's that leadership that we're looking for.

We like the cyclical names small and mid.

All right.

So let's talk about that.

You mentioned financials, industrials, health care, also reaching new highs all time highs this year, at least in the large cap space.

Talk about some of these other groups because for a long time, this talk was just magnificent.

Seven mag seven concentration worries.

And then we had uh the appearance and we this is goes back to that small cap bread thrust that we're talking about looked like things were rotating kind of got kneecap by the yen.

But uh talk about some of these other sectors that are participating.

No, there, there really are.

I mean, look at year to date.

Um 10 out of 11 sectors are positive on the year.

Financials have led, they've led a good chunk of that.

Does this just mean you should own all the sectors?

Well, I think it would.

Well, let's put it this way.

So I get to work with financial advisors all around the country and talk to their clients.

What clients love to do is chase a shiny object.

Oh, tech is the best thing.

Let me have some tech.

Oh That's the word like utilities.

They're terrible.

That's the chili is like one of the best groups this year.

That's the worst thing.

Don't put me in there.

So I think we say, you know, avoid this shiny object, continue to keep a diversified portfolio, continue to rebalance just because something under love now or love now doesn't mean it's gonna be there in 12 months.

So that's uh that's how, that's kind of how we um how we look at that.

But it's a great point because again, unfortunately, I work with clients, um, for 25 years and that's what they like to do throughout history and sometimes they can't help themselves and they make the worst decision at the worst possible time.

That's why, you know, having a financial advisor sometimes goes a long way.

Sometimes the shiny object can make you a lot of money though.

I mean, sometimes that's the right bet, especially in the early innings.

I think the problem comes when people just kind of glum on late in the stage.

But what, what are your feelings on the A I trade?

Um, and the hype cycle we're in a lull right now.

Do you think it re accelerates?

Yeah, we were neutral at best technology here.

And you look at earnings though mag seven is up 30% this recent quarter.

So there's still a lot of earnings growth coming in there.

Um, but again, I think it simply got ahead of itself just a little too much excitement a little bit, you know, the world is gonna change.

There are major changes coming, I'm not minimizing them.

But you see, with some Google and some of the companies said, maybe they haven't, I mean, it's still impressive what's going on, but they didn't quite hit that incredibly high bar.

Um You know, it's just a lot easier to clear, uh clear.

The bar is a little lower and the bar got awfully high for the, for those groups.

But the bottom line again, last I checked tech is still the largest component of the SB of 100.

So you can't just blindly falling apart.

Um You know, the inspect the market to hold up, but you know, they just kind of go market neutral here and again, that Baton is passed some of those cyclical areas and other areas that can lead that is perfectly normal.

And uh we think it's gonna happen and quite uh quite healthy, Ryan, since I've been a participant in markets, I feel like tech has been the leader.

Uh and you know, mag seven pour, everyone's pouring all this money.

And if you're a younger investor, I don't know what kind of advice like, it kind of seems like you should just pour a lot of money into tech.

If you're retiring 30 years out, wait to see what happens.

It doesn't seem as comfortable to go into one of those other sectors like health care or utilities and say all my money or most of my money is going to go there.

So, what do you, what do you say to that great point?

I mean, let's not forget in 22 we had a vicious bear market.

A lot of those Mac Seven and tech names are cut in half down, almost 70% in two thirds of the case.

Facebook was down, I believe over 70% pretty close there.

Um, but I think the bottom line for younger people, um the advice that I have when I, when I get to travel and talk to people is stick with your plan, right?

If you truly want to invest in technology, there's gonna be periods, they're gonna be years where they don't do so well.

And the worst thing you can do is call uncle and get out and then again, go chase something else.

And again, that's why having still being diversified makes sense.

But absolutely, if someone's young and they're gonna invest for the next 25 years, they could have a a we use uh you know, geeky words like tilts and things like that, they could tilt their technology a good deal, but just stick with it because again, there's gonna be times like in late 22 you're not gonna feel so good having uh those mag seven names.

That makes sense.

All right.

It is time for who wore it better and let me get the script.

Oh yeah, I believe this is the debut of the Vics on our who wore it better segment.

So indeed, the VX has been on the move as we've been discussing recently spiking to 65 the third highest level ever.

Sometimes these panics as seen through the Vix, they're short lived, sometimes they persist.

So today we want you Ryan Dietrich to tell us which market environment is wearing the volatility spike better.

So going back in time to the beginning of the VIC in 1990 is it 98 when Russia was defaulting, sending us bond markets in a Tizzy and the Vicks to 46 2008 when Lehman brothers was blowing up, sending the VICS north of 80 maybe the flash crash.

Uh Just two years later in 2010, the Vicks hit 40 this S and P 500 or S and P downgrading Uncle Sam's debt in 2011.

That was a year later.

Vic's 48.

The mother of them all was recent uh March 16th 2020 when the VIC spiked to an eye watering 82.69.

And we didn't even include val maged because it didn't quite get up to 40.

But uh which of these uh vic spiking events do you think the market environment is wearing better?

And it has some predictive uh information about where we are now?

Yeah, I think the late nineties, I think 98 there's some hilarity there because that started with the age of contagion in 97.

Now, the big spike in 97 and we've got some, the Asian things going on.

Let's not forget August of 2015 was again the, the, the, the, the, um, devalued, the wan, that was the 1st 1000 point drop ever in a doubt.

Now, believe me, 1000 points at the end is not the same as 1000 points now.

But that was a pretty, pretty darn scary time too.

But I think the late nineties makes sense.

And why is that?

That's the volatility part of it.

But you have to focus on other things.

We are seeing Jared.

One of our good big themes.

I'm glad I got a chance to remember to even mention this uh productivity we've been saying for well over a year now, we thought productivity was going to go a lot higher.

Uh Josh Josh Schafer, the, the cool the chart book he does.

We shared the that early in the year about expecting better productivity.

Well, we saw that last quarter.

We've seen better productivity for the last year and a half, almost two years down our country.

What in the world does that mean?

Well, that's, it's been a long time since we've had that.

Ok, the mid to late nineties was the last time we saw strong productivity.

What does that mean?

Well, Greenspan told us way back then you can cut interest rates, you can pay higher wages, but you don't have to worry about a massive spike in inflation.

We saw that in the mid nineties.

We see some similarities right now.

We think the fed's going cut.

Why is somebody worried the fed's going to cut?

Maybe you see a spike back in inflation and trust me, it could happen.

But with a stronger productivity, we, we're comfortable saying that's not the case.

I see some similarities right there.

I have a V related question because we've been talking so much about it.

I feel like I've never focused on it more in the last three years.

This is a great day for Sydney right here.

Who is the Vick for like who should be trading options?

Like I I don't really understand who should be dealing with the Vicks.

The simplest way to put it.

The VX is a guess on volatility the next 30 days out.

So it's for shorter traders.

I mean, it is for shorter term traders, honest to goodness a lot of smart people I know two days ago and we had that big vic bike were selling volatility.

They were selling iron Condors and selling puts and selling things like that without getting too geeky on this.

Vix is low.

You, you could say, OK, well, there could be a spike higher but we just went 18 months without a 2% drop for in one day.

A lot of people expected more volatility.

Now it's here.

No question.

But I think it's, it's just important for your average investor.

When they hear the Vicks, they hear someone on TV, like myself or somebody talking about it.

When you see that spike above 30 or 40 the VX is a mean reverting instrument.

It rare like kind of like oil.

Look at oil, oils, like been flat.

The price of gas has been flat for almost 15 years.

Think about it.

But the vix is that way too.

It spikes but then it can come much lower.

Um And, and that's, that's kind of how it works.

That's the average person shouldn't think of it like that on that.

We sort of have been talking a little bit about advice for early investors.

What is one piece of advice you wish you could have told yourself when you kind of started dealing with the markets?

Yeah, great question there.

So I started late nineties.

All right.

So I was caught up in that bubble.

Um you know, um and I lost a lot of money and made some money on the way up and then lost but I learned, oh well, ok, bubbles happen and you get all caught up.

So I just always kind of remember a lot of smart people.

I wasn't that smart when I was younger, but a lot of smart people can get caught up in a bubble.

So if that kind sir, Isaac Newton, ok.

He lost, he lost his, you know what?

And you can see bubble he made a lot of money on the way up and then he re bought at the top and rolled it all the way back to Isaac.

Well, the point, the point, you know, fun, playful way, but the point is that one of the smartest people to ever live could get caught up in a bubble because his neighbors were getting rich.

I was getting rich and he wanted to get rich or put more money in.

And then he, I believe he died very poor, I believe and bitter and bitter and bitter.

So anyway, if that could happen to him, it could happen to a lot of people, right?

It could happen to anybody.

So I think it's just important to remember that.

But the other thing for young people, you're gonna blink and you're older, it happens fast.

Uh Time really is on your side, you know, can start to put as much as you humanly possibly can in 401 Ks and Roths and Ira S all that stuff.

Um because you're gonna really, your future self will thank the young self who wants to take that money and go see the Olympics.

Um But you might thank yourself a lot more down the road.

15 seconds.

Any final words, for words, for investors?

I just think we, we've gotten through this before.

We've had scary times before investors need to remember that we're gonna get through this again.

11 final thing, earnings are still strong, I mean, earnings are still strong corporate America.

I know A I was a little weak tech, a little weak but other groups look what three M said?

Ok, people are still spending money.

This economy is still strong.

So that's gonna drive us.

We think still to new highs before this year is over, Jared.

All right, we're gonna leave it there.

Sydney Ryan.

Thank you.

Thank you.