Fun With Fun Facts

Investment trivia might be useful for quiz night, but not for your portfolio. (Photo by natasaadzic/iStock by Getty Images.)

MarketMinder does not recommend individual securities. The below simply illustrate a broader theme we wish to highlight.

Pub quiz! Here are three fun factoids. What do they have in common?

1. FAANG stocks'^[i] best two-week historical performance lies between October 10 - 24-coinciding with Q3 earnings season.
2. The S&P 500 has risen every month this year, which has never ever happened before.
3. Q4 is historically MSCI World's best quarter in terms of average returns and the frequency of positive returns.

If you answered, "They're all fun but meaningless," congratulations! You win a pat on the back and your drink of choice. These are all just interesting observations-they don't predict forward-looking stocks, aren't guaranteed to continue and probably shouldn't influence your investment decisions. Always beware of correlation without causation.

Without a fundamental cause, interesting observations aren't actionable. What makes this year's two-week October stretch special for FAANGs? If the answer is, "because it has happened before" (or even a lot), that isn't good enough. Without knowing a fundamental reason why they happen to jump now, it's useless trivia at best-if circumstances changed, how would you know? (Besides, outside of FAANG's historically best two weeks, they've still delivered world-beating returns. But that's because big Tech's strong profit growth, high quality and massive size are in favor presently, not because of calendar quirks.)

Likewise, the S&P 500's steady rise this year and MSCI World's Q4 historical positivity tell you nothing on their own. They don't make it any more or less likely for the S&P 500 to bust its legendary "year seven" affliction, which is itself an exercise in meaningless pattern-seeking. Stocks aren't serially correlated-one day's movement doesn't influence the next day's. Fundamentals don't magically get better during the year's final three months.

We could probably whip up a hundred more fun little stats. Which day of the year has the best historical average returns? Do Mondays totally beat Thursdays?^[ii] Is Friday the 13^th, Leap Day or a blue moon more bullish? Is the secret to investing success selling at 9:23 AM PDT the first Monday after the vernal equinox and then buying in the second-to-last Tuesday before the summer solstice at 11:57 AM PDT? (Good luck timing that if you're in Arizona.)

It would be great if all this worked, but it doesn't. Past patterns don't dictate future results. Like any other seasonal investment advice-sell in May, come back in September or maybe October, the January effect-investment returns don't automatically follow a data-mined or one-off pattern. Even if any of these little tricks and treats worked once upon a time, it would get quickly priced in. People would try to get in front of it. Maybe you'd have to sell three weeks before the start of spring and get back in before June. Markets adapt to incorporate all widely known information, beliefs and expectations. No one weird trick works for all time-when everyone does it, the effect fades.

"What" happened is important to know, but without a sound, probable explanation of why it happened, you can't judge whether it will repeat. In the absence of "why," "what" is trivial. In our view, some historical observations do have power, like market returns in election and inaugural years. Usually, when Democrats are elected, you get weak returns in the election year and above-average returns in the inaugural year. With Republicans, it's usually the opposite: strong election year, below-average inaugural year. But there are also identifiable reasons why this holds true. Prevailing wisdom views Republicans as pro-market and Democrats less so-in the lead up to election, investors typically cheer if a Republican is polling ahead and jeer if it's a Democrat. But then inauguration year reality sets in against too high (Republican) or too low (Democrat) expectations as neither deliver what investors' hoped or feared-damping or boosting returns-respectively.

Understanding this causation can help you understand why the historical pattern seemingly broke last year and this year: As President Trump campaigned on protectionism, drug price caps and other market-spooking proposals, investors feared him the way they typically fear Democrats, dampening election-year returns. This year, he has proven far less anti-business than feared, and markets have rallied. Investors who entered 2017 understanding the historical pattern and theoretical causation had a leg up, in our view. But to see this, you'd need to find, understand and apply the "why."