What History Teaches Us About October

Welcome back!

We hope you had a wonderful thanksgiving weekend spent with family, friends, and (hopefully) lots of turkey! We want to start off this monthly commentary by sincerely thanking all of you who completed our survey over the last month. The information and feedback we received will be used to continually improve our service and value proposition to you. If you didn't get a chance to offer any feedback, please feel free and shoot us an e-mail or give us a call! We're always open to hearing how we can improve.

Now, onto a quick market update:

Over the past month the S&P 500, DOW, NASDAQ, TSX, and Gold have all experienced price declines ranging from 0.5% up to 1.6% (as of Oct. 11, 2019). We've seen volatility increase over the last month, due primarily to the US-China trade talks in the last week and with the spike of repo rates at the end of September. 

Huh...? Repo rates? Jon, what are you talking about?

I get it.. there are so many headlines and financial jargon out there it can be hard to decipher what's actually going on. As I'm writing this I'm wondering how many of you actually care about all the noise that comes with investing in the markets.

With that being said, I thought I'd present some data which reflects on the bigger picture and why this may be the best time of the year to invest.

Seasonality In The Markets

Here is what this chart tells you: If you average out returns for the last 69 years you end up with the months of August-November being months were the market could experience some declines. The best months on average are November and December! For investors that are stewards of history, the month of October would present a great buying opportunity for anyone willing to take action.

If that doesn't convince you, here's another piece of information you may find convincing.

Individual Investor Sentiment

The blue line on the chart above shows the 20-week rolling average of individual investor sentiment. This indicator is now at its 2nd lowest level in a decade (as measured by the AAII Bull Ratio, which surveys individual retail investors and how positive they are about the markets moving forward).

Zooming in on the chart for the last three years... and you will see that current individual investor sentiment is under 35%, into extreme pessimism territory (see chart below).

Individual Investor Sentiment (3yr)

One of the last times we saw investor sentiment this low was in December of 2018, and what did investors do? They pulled money out of the market. 

 

If there is one thing you can learn from the markets, it would be to do the opposite of what individual investors are doing. They have a poor habit of buying at tops, selling at bottoms, and trading too frequently in between. The two months after investors pulled large amounts of money out of the market, the S&P 500 went on to rally 11.1% - the 5th biggest gain in the entire history of the S&P 500.

Bad move for the small guys.

If we looked into the past to see what this level of pessimism teaches us about the markets, here's the data.

S&P 500 after 10 lowest Bull Ratio's through 41 weeks (1987-2019)

Based on these signals, you can see the 6 month and 1 year returns after these signals have been extremely positive. If you look out 1 year from these signals, the market has been positive 100% of the time, with median returns of 11.9% and very favorable risk/reward metrics. 

The bottom line is this - when investors reach this level of pessimism, it's time to step up to the plate and buy.

It may not seem easy as there have been lots of negative headlines in the news this year, but this indicator is anything from negative. If you have the conviction to top up your TFSA, make your RRSP contribution early, or invest idle cash, this may be a great opportunity.

Looking for new, unique ways to invest? Reach out! Ed and I have been meeting with fund managers and doing due diligence on potentially very rewarding strategies going forward, and we'd love to explore these options with you.

Have a great week!
  
Jon

Jonathan Adomait
Financial Advisor, BASc

P.S - Have questions or want us to discuss a particular topic? Let us know by sharing your feedback!