The final four months of the year are a particularly interesting period for stock markets, often associated with recognizable seasonal patterns.

In this article, we'll analyze market performance in September, October, November, and December, comparing two major stock indexes: the S&P 500 for the U.S. market and the DAX as a European benchmark.

Our goal is to determine whether the final four months of the year have historically shown recurring patterns and whether those patterns have been similar or different across the two markets. We'll also examine fourth-quarter returns following a positive or negative September.

S&P 500 and DAX: Comparing US and European Stock Markets

To represent the two markets, we selected the S&P 500 for the United States and the DAX for Europe. The S&P 500 includes 500 leading U.S. companies and covers a substantial share of U.S. stock market capitalization, making it one of the most widely used benchmarks for U.S. equity performance.

The DAX, meanwhile, includes 40 leading German-listed companies and represents one of Europe's most important stock markets. It's worth emphasizing that the DAX specifically represents the German market, rather than Europe as a whole. Nevertheless, its size and significance make it a useful benchmark for comparing a major European stock market with its U.S. counterpart.

The two indexes also differ in their sector composition. At current weights, technology plays a particularly prominent role in the S&P 500, while industrials account for the largest share of the DAX, followed by financial services.

These weights are a snapshot of the indexes' current composition and should not be treated as constant over time. Sector exposure has shifted over the years, as have the companies included in each index and their relative weights.

September Through December: What Average Returns Show

Let's start by examining the average return for each of the final four months of the year, using data beginning in 1998. As Figure 1 shows, September is the only one of these months with a negative average return in both markets: approximately -1.06% for the DAX and -0.62% for the S&P 500.

The picture changes considerably in October, which posts an average positive return of approximately 1.55% for the DAX and 1.18% for the S&P 500. The two markets show even more similar results in November, with average returns of 1.54% and 1.50%, respectively.

December also shows positive average returns, although the gap between the two indexes is wider: the DAX averages approximately 1.45%, while the S&P 500 averages 0.68%.

Overall, Figure 1 reveals a broadly similar seasonal pattern across the U.S. and German markets.

Figure 1. Average monthly returns for the DAX and S&P 500 from September through December, based on the sample beginning in 1998.

A Long Strategy From October to January

The initial analysis shows that both the S&P 500 and the DAX have historically posted positive average returns in each of the final three months of the year. Based on this finding, we can construct a very simple strategy: open a long position at the beginning of October and hold it until the beginning of January.

We can then introduce another variable. As we've seen, September is the only month in the final four months of the year with a negative average return in both markets. We therefore divided the trades into two groups: those following a positive September and those following a negative September. This allows us to examine whether the previous month's performance is associated with differences in returns over the following three months.

Average Q4 Returns Are Higher After a Negative September

Looking at Figure 2, the first notable feature is the strong similarity between the equity curves of the strategies applied to the DAX and the S&P 500. The curves follow broadly similar paths over time, further highlighting similarities in the seasonal patterns observed in the two markets.

It's also important to remember that these strategies are deliberately simple and include no risk management rules. Positions are opened at the beginning of October and held until January, regardless of what happens in between. This is particularly evident in 2008, when the sharp stock market decline caused a significant drawdown in the equity curves.

The most interesting finding, however, concerns performance following September. Although the number of trades is nearly identical in the two groups, the strategies that enter the market after a negative September show substantially higher average returns. For the DAX, the average return per October-to-January trade rises from approximately 3.73% after a positive September to 5.80% after a negative September. A similar pattern emerges in the S&P 500, where the average return increases from approximately 2.37% to 4.63%.

In both markets, September weakness does not necessarily persist into the following months. On the contrary, within the sample analyzed, the final three months of the year delivered better average results when September had ended in negative territory.

Figure 2. Equity curves for the October-to-January long strategy on the DAX and S&P 500, separating trades following a positive September (dashed lines) from those following a negative September (solid lines).

From Seasonality to a Trading Strategy: Limitations and Further Research

The analysis of the final four months of the year reveals broadly similar seasonal patterns in the S&P 500 and the DAX. An even more interesting finding emerges when September's performance is introduced as a filter: for both indexes, the average October-to-January return was substantially higher following a negative September.

One possible explanation is mean reversion, or a recovery following a decline. If the conditions behind the selloff do not develop into a deeper crisis, some of that decline may subsequently be reversed.

Once again, the analysis presented here should primarily be viewed as a starting point for further research. The simple strategy used does not include stop losses, early exit criteria, or other forms of risk management. The pattern could be explored further by introducing filters based on the size of September's decline, the longer-term trend, or different entry and exit rules.

Until next time, happy trading!

Disclaimer: This article is from an unpaid external contributor. It does not represent MarketDash's reporting and has not been edited for content or accuracy.