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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