Simple logic tells us that seasonal investing shouldn’t work. After all, aren’t stock markets supposed to factor in seasonal differences when pricing securities? It would be reasonable to expect that the seasonal boost that some industries receive is priced into stocks in those sectors throughout the year. Take retail, for example. It is so obvious that the fourth quarter is of outsized importance to the industry that you would not think that there would be any noticeable advantage to buying those stocks at the end of Q3. You might think that, but, according to recent history, you would be wrong.
As the table below shows, in four out of the last five years, the SPDR S&P Retail ETF (XRT) has offered positive returns if bought at the beginning of November and sold at the end of March, with an average return of 8.8 percent.
The catch, of course is that the last two years have offered the worst returns of the 5 years, with the only loss coming two years ago and last year offering a meager 2.5 percent return over the period. In both of those years the retail ETF has actually lagged the overall market, and that is a sign of the fundamental problems facing the sector. Online shopping continues to grow apace and many of the traditional retailers responded late and, in many case, ineffectively to that challenge, dragging down overall performance. There are, however, reasons to believe that this year could see the beleaguered sector make a significant recovery.
So far this earnings season the overriding theme from companies looking to explain disappointing results has been clear. The strong dollar has been the excuse du jour, causing much wailing and gnashing of teeth among exporters. Logically, though, if that has been such a huge problem for them, it must be a big benefit to importers, such as retailers. Most of them do business mainly in the U.S. and sell mainly imported goods. Simple logic tells you that that should increase margins and/or sales if prices are lowered.
This year has also seen many of the retailers who have lost ground to e-commerce beginning to fight back. The “omnichannel” concept has caught on, combining online ordering with in store pick-up or just simple delivery and attempting at least to offer consumers a seamless experience whether online, mobile or in store. We can still expect Amazon (AMZN) and other large online sellers to do well, but XRT includes them among their holdings. If traditional retailers prove to be less of a drag on the index than in the past couple of years another big seasonal return is on the cards.
If that is to come, though, we need to see reports of good, or at least better than expected, holiday season sales. Whether or not that comes depends on me and you, the domestic consumers. Much of this year has been spent waiting for consumer activity to pick up in response to lower gas prices, but until recently that just hasn’t come.
Most people aren’t stupid, however, and the extreme volatility in energy markets has made them skeptical that lower prices will last very long. If things remain settled through the holiday period, though, what better time to open the purse strings a little? If nothing else, lower oil prices will keep transportation and delivery costs in check for retailers.
With only a couple of weeks until Thanksgiving here in the U.S., we are about to enter the holiday season, when all of the worries are put aside and hope and good cheer dominate the public spirit. That, along with the traditional pictures of mayhem on Black Friday should see us return to the tradition of rising retail stocks at the year’s end and optimism about the season’s results could prompt some big gains. Whether they materialize or not, the perception of a good holiday season should be enough to make a broad based investment in retail such as XRT a good bet over the next couple of months.
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