Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

2nd Quarter | 2022

Market insights and analysis


Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By David Wismer

The Halloween season has always been one of my favorite times of the year.

Although it may sound like a cliché, it starts with the weather: the fall colors, the crisp temperatures here in New England, and the changing light patterns.

I also have fond memories of learning pumpkin carving with my siblings and parents, trick-or-treating with a pack of neighborhood kids, and attending some memorable parties as a teen and young adult.

And then there were the years of trick-or-treating with my own children, before they finally reached the age when they insisted on going out on their own. We have also always enjoyed greeting the kids and adults coming to our house on Halloween, setting up some spooky decorations, and my wife and daughter dressing in some sort of creative costumes. (I particularly remember my wife as a pretty convincing Conehead and my daughter in an elaborate Jack Sparrow outfit.)

Of course, Halloween this year will be vastly different around the country—for good reason.

Our town, which has to be commended for extensive communications throughout the COVID situation, sent out some guidelines for the Halloween season last week. (These are largely based on Connecticut and CDC holiday guidance.)

Here are some of the highlights:

- While trick-or-treating is not encouraged and considered a high-risk activity, it is permissible. It is recommended that children not travel in large groups, stay in their own neighborhoods, limit the number of homes they visit, and maintain social distancing at each house (easier said than done).

- No large gatherings over 25 people are allowed (even though we just entered phase III in Connecticut, it still surprises me that “party” groups that large are allowed), and it is encouraged that activities be held outside.

- Traditionally popular streets for trick-or-treating and the town’s major gathering spots—downtown, the beach, and parks—will be closely monitored.

- Techniques for “one-way trick-or-treating where goodie bags or a large bowl of candy are placed outside of your home for families to grab and go while continuing to social distance” are encouraged.
(If you look online, there are numerous articles outlining creative, as well as safe, ways to give out treats, from long “candy chutes” to decorated stations on the front yard loaded with individually wrapped bags, where kids and parents can maintain some sort of distancing.)

- In lieu of some traditional Halloween parties and a parade, our town has instituted several alternative events, including a townwide “Halloween House Decorating Contest.” Also, many private and public organizations in our area are reaching out with mobile events to try to give as many kids as possible some sort of Halloween celebration and treats.

While I am sure many will miss a lot of the normal activities, parades, and parties around Halloween, it is great that a lot of effort and planning have gone into finding some safer alternatives.

A look at the market’s upcoming “Halloween Effect”

The Halloween season is also noteworthy for the stock market phenomenon known as “The Halloween Effect.” More on that in a moment.

This year has not played out according to most scripts, for obvious reasons. However, September’s historical market weakness did come to pass, which has traditionally led to higher volatility in October. Volatility has occurred to some degree so far this October, but it has been more of an extension of the trend of increasing volatility that started in February and March. Before February, the CBOE Volatility Index (VIX), also known as the “fear index,” was in a range between 12 and 16 for many months. For most of the past six months, it has moved into a range of about 25 to 30. (Over time, the VIX typically has had a median value around 17 and an average close to 20, with spikes much higher.)

Figure 1 looks at October’s historical standard deviation, the highest of all months, and Figure 2 provides a view of the CBOE Volatility Index (VIX) over the last month.

An Advisor Perspectives article proclaimed a few years ago, “If you don’t like volatility, you’ve traditionally been happier when Halloween is a memory.” This brings us to the market’s seasonality adage of “The Halloween Effect.”

Simply stated, the historical data favor positive trends for the markets in the remainder of the fourth quarter following Halloween and in the first third of the following year (including the often-seen “Santa Claus rally,” which encompasses the year’s last five trading days and the new year’s first two). While related to the saying, “Sell in May and go away,” it puts a finer point on it by identifying the post-Halloween period as a time for lower volatility and enhanced returns.

That said, October, despite its volatility, has still been a positive month, on average (Figure 3). However, it has also seen more than its fair share of market crashes and bottoms. A recent article by a quantitative analyst in Proactive Advisor Magazine pointed out that, in October, “volatility cuts both ways.” The article says that since 1985, when analyzing each specific week’s performance compared to the other 51, “it’s amazing that all five potential weeks in October are included in either the ‘Best 10’ or the ‘Worst 10’ weeks of the year.”

Figure 4 provides a Bloomberg analysis covering two different periods, 1970-2017 and 1991–2017. It shows the difference between an investment tracking the S&P 500 only during the “best” six months of the year (November–April) versus investing only during the “worst” six months of the year (May–October). The results are quite striking, reinforcing the notion of “The Halloween Effect.”

Of course, each year’s results will be different, and, as seen in February and March of 2020, investing only in the “best six months” does not guarantee an investor will sidestep major market declines.

In a year like 2020, where the only thing that is predictable is unpredictability, I believe the wisest course is not relying on market adages. Instead, I think disciplined and dynamically risk-managed strategies, such as those provided by Flexible Plan, will go a long way to making investing in any season more productive, less volatile, and far less “frightening.”

Wishing your family a safe—and fun—Halloween!

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