November, December, and January have proven to be among the top five months for risk-adjusted returns as recent stock market rallies bolster investor sentiments. UBS US Equity Derivatives Strategist Maxwell Grinacoff explains seasonality conditions this late in the year.
"We are a bit selective... we are cognizant, we are acknowledging of the fact that growth does have this fundamental AI tail wind and it's seeing another tailwind from the the recent softening in rate," Grinacoff tells Yahoo Finance on factors to consider. "But there are other pockets of the market, rate-sensitive pockets of the market like real estate or staples."
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This post was written by Luke Carberry Mogan.
- All right, well, the recent stock rally buffeted by reports inflation is cooling, driving investors to adjust their portfolios.
According to data from UBS, the months of November, December, and January are some of the best for US equity risk adjusted returns.
Seasonal trends suggest it could be the right time to get into certain areas of the market that have been underperforming this year.
Here with more is Maxwell Grinacoff, UBS US Equity Derivatives Strategist.
Max, thanks for being here.
Before we dig into those specific areas, I want to get you to expand a little bit more on seasonality, which we've been talking a lot about as of late.
How powerful a factor is that?
And are you just as a result of absolutely convinced that we are going to continue to see a year end rally here?
MAXWELL GRINACOFF: Yeah, thanks for having me, Julie.
Look, market anomalies like the Santa rally, the January effect.
You know, I feel like every year they become ever topical.
So this latest rally has a few things going for it.
Seasonality wise, as you so rightly point to.
November and December screen as some of the best months for US equity risk adjusted returns.
We've already also seen a notable pickup in investor sentiment post that cooling November CPI print that increase in investor sentiment is also seasonally in line with history at least over the last 30 years.
Now, macro wise, that cooling CPI print also completely took December FOMC off the table as a live meeting.
And rates have normalized pretty swiftly, as you mentioned.
Now positioning wise, we've seen systematic strategies like CTAs turn net buyers, which could also further exacerbate upside flows.
On the option side we've also seen near record highs in IWM call open interest, even before the 5% one day rebound in IWM.
So investors clearly singing a different tune there.
- And Max, seasonals always interest me because you know, Max, if we know about it, Max, and Josh, and Julie are all talking about it, isn't it already priced in?
MAXWELL GRINACOFF: Priced into to an extent.
Look, I do think there are pockets of the market that have been significant underperformers.
You look at small caps, which you mentioned before.
I like to say in terms of small caps, every dog has its day, right?
So we like upside optionality in small caps, but merely as a right tail hedge.
For this rally in small caps to be sustainable, we think we need to see a true no recession or soft landing scenario actually come to fruition for you to see a true sort of valuation rerating in a lot of these smaller cap stocks.
And then just going back to the history point.
Look, history dictates that in the last two months of the year, you do tend to see these year to date laggards that have been de-rated all year start to outperform the leaders, whether that's due to things like tax loss harvesting or window dressing.
And the laggards tend to be lower in terms of quality.
So what we would rather look to do is look for the areas that have underperformed, but still have higher quality balance sheets are seeing stronger earnings momentum following this last earnings season, and are more under owned or shorted in terms of investors positioning.
- So, Max, before we get to maybe what some of those ideas are.
The outperformance this year, as we were just discussing, both all year and more recently have been large cap technology.
So is what you're saying suggests that we might see a loss of momentum in that group in particular going into the end of the year?
MAXWELL GRINACOFF: So, look, I think we are a bit selective.
We are cognizant, we are acknowledging of the fact that growth does have this fundamental AI tailwind, and it's seeing another tailwind from the recent softening in rates.
But there are other pockets of the market, more rate sensitive pockets of the market, like real estate for example, or staples very rate sensitive sectors, defensive bond proxy sectors that have taken the brunt of the rates move.
Not necessarily having the same earnings tailwind that large cap tech has had.
So we do think there's a bit of a catch up trade in things, like real estate into the end of the year.
And we've already seen that play out a bit over the last few trading sessions.
- What about health care, Max?
Is that also look attractive to you?
At least here in the near intermediate term?
MAXWELL GRINACOFF: Yeah, I would say I would lump that into the same sort of category in terms of defensive sector at the end of the day, a little less rate sensitive, at least top down.
But when we look at that screen of like I said higher quality balance sheets, pick up and earnings momentum, and just more under owned pockets of the market, that is another sector I would say that kind of fits that criteria.
- Now, Max, when you're doing derivative strategy, this is not like a 12-month strategy.
Typically, you're looking more tactically more short-term.
So if investors are looking for this kind of a strategy into year-end, how quickly do they then need to pivot out of it?
Or for what kind of timeline should they set up their trades for something like this?
MAXWELL GRINACOFF: Yeah, it's a great question.
And it is tactical.
There is typically, at least history dictates, there is typically a two to three-week window in which you see the laggards start to outperform and vice versa, and that sort of starts to reverse into year-end.
Now, something to note is that as you get into your year-end, you also start to get that Santa rally effect, where everything sort of rises.
So a rising tide lifts all boats.
But at least, when we're talking about our drainers versus gainers for the year, there is a very short window to your point.
- All right, Max Grinacoff.
Max, thanks so much for joining us today on this Friday.
We appreciate your time.
MAXWELL GRINACOFF: All right, thanks for having me.
