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Will These Downtrodden ETFs Enjoy Halloween Effect?

Sanghamitra Saha
These ETF areas have been bashed in October. Will these be able to enjoy the Halloween Effect and stage a rebound in winter?

It may sound as an irony; the occasion of ghouls and ghosts can turn into an occasion of angels for Wall Street. Yes, it’s the Halloween Effect that normally lights up Wall Street.

In any case, the month of October turned out to be spooky enough for investors with the three key indices shedding in the range of 8.3% to 12% in the past month (as of Oct 29, 2018). Investors are followed by the specter of global growth worries that emanated from U.S.-China trade tensions and rising rate worries.

But as you start carving the pumpkin, glooms over Wall Street are believed to be passing away. Historically, investing in equities on All Hallow’s Eve — Oct 31 – earns investors solid long-term returns. At least research shows that.

What is Halloween Effect?

According to Forbes, a study conducted by Ben Jacobsen and Cherry Y. Zhang of Massey University in New Zealand shows that over a 300-year period, stocks habitually traded 4.52% better in the November through April period than the summer months. Over the past 50 years, the disparity in performance was more glaring at 6.25%. This trend holds true in 35 countries.

According to their analysis of 65 developed and emerging markets, average stock-market returns for the six months following Halloween have come out at around 8.5% a year. And this bounce is called Halloween Effect.

Halloween Effect is a historically observed increase in stock prices from the month of November through the end of April. It is exactly opposite the popular adage "sell in May and then walk away,” which refers to the six months between May 1 and Oct 31. It is a seasonal anomaly, which is dissimilar to the buy-and-hold strategy, in which an investor has to go through down months. Vacations, holiday buying season (both Christmas and spring) and seasonal optimism probably contribute to this optimism.

What About This Year’s Halloween Bump?

Some spheres of the equity market have seen scary slides in October. Let’s see if these have fundamentals strong enough to stage a quick rebound and give investors nice treats in the coming days.

Technology

As per Equity Clock, the tech sector enjoys seasonality in Q4. Fundamentally, the entire tech is well poisoned at this moment, with some specific corners showing promises. Invesco Dynamic Networking ETF PXQ could be on investors’ radar. The fund has lost moderately at 11% in the height of tech selloffs in October, but has performed better in the past week, having retreated modestly (read: Why to Cash in on the Slump & Grab Tech ETFs).

Consumer Discretionary

This should be the most lucrative bet right now, withconsumers waiting for Thanksgiving, Black Friday and Cyber Monday. The National Retail Federation (NRF) estimated that Americans will likely spend a staggering $9.0 billion on Halloween. And “conventional wisdom is that strong Halloween spending is an indicator of strong Christmas season spending,” as per an analyst.

The NRF expects holiday retail sales in November and December to rise between 4.3% and 4.8%, while Deloitte moved even further having estimated a robust 5% to 5.6% sales growth this holiday season.

As far as the past week’s trend is concerned, funds like First Trust Nasdaq Retail ETF FTXD, iShares Evolved U.S. Discretionary Spending ETF IEDI and Invesco Dynamic Retail ETF PMR have fared better.

Small-Cap

With the U.S. economy on a steady path, smaller-cap stocks are likely to stage a good show. Smaller stocks are best reflected by the strength in the domestic economy and do not get perturbed by a stronger U.S. dollar due to lesser exposure in foreign lands.

Plus, studies have shown that the Halloween effect was stronger for the small-cap stocks than the larger ones. Also, small-cap securities have historically proven their outperformance in January. Notably, small-cap fund iShares Russell 2000 ETF IWM already witnessed inflows of more than $1.17 billion last week, per Bloomberg.

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