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Portfolio Rebalancing and Seasonality in Canadian Financial Markets

















































Portfolio Rebalancing and Seasonality in Canadian Financial Markets – Journal of Investment Strategies





  • For the period 1957-2018 and sub-periods, this document provides supporting evidence for portfolio rebalancing. Seasonal strength was seen in Canadian equities, especially small-cap stocks, early in the year, with the rest of the year, especially the second half, showing broad-based weakness compared to January. The reverse happened for Government of Canada bonds, as predicted by portfolio rebalancing.
  • The paper also supports the phrase “sell in May and walk away” because the average performance of risky stocks was higher in the November-April period than in the May-October period. The reverse was true for risk-free bonds. This evidence is also consistent with portfolio rebalancing.
  • If investors had consistently invested in risky stocks from November to April over the past 60 years and rebalanced their portfolios across risky stocks and government bonds for the remaining annual period, they would have outperformed the market by a significant margin. .
  • The paper’s findings have implications for ongoing research into the drivers of the seasonality of financial stock returns. The seasonality of government bond yields evident in this paper is not consistent with tax-loss selling. Moreover, the lack of seasonality in government bond yields in 1957-1987, when there was strong seasonality in 1988-2018, is also inconsistent with meteorological explanations for the seasonality of financial securities.

Using Canadian data for the period from 1957 to 2018, this article provides evidence supporting portfolio rebalancing by professional portfolio managers. We document strong seasonality in Canadian equity and government bond index returns. However, the seasonality of the returns of the Canadian government bond index is in the opposite direction to that of the Canadian stock market index. Seasonal strength is seen in equities, especially small cap stocks, at the start of the year, with the rest of the year, especially the second half, showing widespread seasonal weakness compared to January. The reverse is true for Government of Canada bonds, confirming the predictions of the portfolio rebalancing hypothesis. Additionally, this paper supports the popular phrase “sell in May and walk away,” as the average performance of risky stocks is higher in the November-April period than in the May-October period. The reverse is true for Government of Canada bonds, which is also consistent with portfolio rebalancing. The conclusions of the document will be useful not only to institutional investors, but also to individual investors. Understanding the seasonal behavior of financial markets and the inefficiencies imparted to them by institutional factors will help investors achieve higher returns and a better retirement.

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