For investors willing to sell before May, seasonality adjustment might come to the rescue. The chart below shows that over the last three years, the U.S. economy has shown a regular pattern of strong start followed by a sharp deceleration in the spring.
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This seasonality is not new, but the strength of the pattern (compared, for instance, with 2007) has led the Department of Commerce to re-assess its seasonal adjustment factors.
According to the ISM website, those factors are "used to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to non-movable holidays."
The chart below shows the upward move in the "production" component of the ISM Manufacturing Index (each sub-diffusion index is divided by its seasonal factor). Over the last few years, seasonal adjustments for Spring have consistently been revised on the upside!
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This poses a real threat for next months' ISM reading as the current news flow behavior is different from that of the last few years (see orange line in the first chart).
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As can be seen above, stocks have not fared well during spring months in the past. Beyond economic seasonality, other factors, like portfolio flows, may also be to blame.
As short run stock returns are highly cyclical, seasonality adjustments may give a downside biased view of the economy at a time when stocks are posting a 15% increase from their November lows. As many investors remain concerned by the current momentum, seasonality could add to the long list of reasons why the stock market could fall.
Even if the economy remains resilient, seasonality adds to the factors that could weight negatively on indexes (SPY) over the next few weeks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
