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August 2025 Market Commentary

STOCK MARKET SEASONALITY

2025 continues to be a very unusual period. Through August 14^th, the S&P 500, Russell 2000, and MSCI EAFE indexes had year-to-date returns of 10.8%, 5.2%, and 23.3%, respectively, and, as we all know, the path to achieving those returns hasn’t been straightforward at all.

As the summer winds down, we thought we’d take a break from discussing the challenges of tariffs and other US policy changes and take a brief look at a topic that is quite interesting but ultimately difficult to explain: seasonality in equity returns. By “seasonality,” we mean the trend toward systematically higher or lower returns occurring in certain months of the year.

To do this, we engage in a series of thought experiments: what would have happened if we ran an investment strategy that invested in equities for the entire month of January in every year over some defined period, and held uninvested cash for every other month of the year? Likewise for February, March, April, and so on through December. Additionally, would the results be consistent across different universes of domestic and international stocks?

In all, we construct 12 backtests for each of the S&P 500, the Russell 2000, and the MSCI EAFE indexes to answer these questions for the 46-year period from 1979 through 2024. This is the longest period over which we have historical price returns for each of the indexes. The S&P 500 represents the US Large Cap universe, the Russell 2000 represents the US Small Cap universe, and the MSCI EAFE represents the non-US developed market Large- and Mid-Cap universe.

The structure of the backtests allows us to determine if there are statistically significant differences in monthly price returns based on the month of the year. Exhibit 1 shows the cumulative compounded returns that resulted in each of the 12 backtests for each of the three indexes. The tan line in each chart shows the 46-year compound return that would have resulted from investing only in each specific month. The dashed black lines show the compound return that would have resulted if returns in each month were identical. For example, investing in the S&P 500 in November of each year (and holding uninvested cash otherwise) would have generated a 157.8% compound return over the 46-year period, a return that is significantly higher than the 40.9% compound return that would have occurred if returns in each month were the same.

Exhibit 1. Cumulative Price Returns By Month of Investment

Source: Bloomberg, AAFMAA Wealth Management & Trust LLC

Overall, several themes emerge:

First, there are indeed large differences among compound returns achieved by investing in only a single month in each year – or, by extension, there are large seasonal effects in monthly returns.
Second, returns in September appear to be uniformly weak across indexes.
Third, returns in April and November-December appear to be stronger than average, though in April primarily for the S&P 500 and MSCI EAFE indexes.
Fourth, the vast majority of positive US small-cap returns appear to have occurred in November and December.

Further analysis of our backtests suggests that the patterns that exist over the 46-year period also occur over smaller time periods. We looked at successive 15- and 20-year periods and found similar results. This means that the charts in Exhibit 1 have not been overly influenced by particularly negative or positive periods, including the early 2000s recession, the Great Financial Crisis, or the massive 2023-2024 rally. That is not to say, however, that the seasonal patterns in Exhibit 1 occurred (or will occur) every year. In fact, the first seven months of 2025 have not fit the pattern – returns this year have arguably been driven by non-cyclical, exogenous factors.

The results also show that the volatility of price returns has been significantly higher than average during the month of October.

The obvious question is why these patterns occur. Unfortunately, no one has been able to articulate strong, data-supported answers despite the abundance of popular proverbs like “Sell in May and go away.” So, what do we do with this information? Equity investors with the ability to use derivatives could potentially hedge their portfolios in months like September or go overweight in months like November and December by putting on options positions.

For the vast majority of wealth management clients, though, the answer is to take the seasonality in stride and focus on long-term returns. It is often impractical from a tax and transaction cost perspective to sell stocks into historically weak months and buy stocks into historically strong months. Rather than timing the market, we recommend continuing to focus on economic fundamentals and identifying companies and sectors that offer stable long-term business models at a reasonable price.

Enjoy the rest of your summer!

With warm regards,

Paul

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