Stock returns by month are not as variable and unpredictable as one might think, over the long run.
Sure, performance from one month to the next can be quite different. Some months see prices increase, other months see prices decline. Yes, there are peaks and valleys that appear when you view charts of stock prices. This even happens from day to day, and within days as well.
However, this assessment of stock prices is often made from visual perspective. When you graph prices with a time-series approach, it’s easy to come to that conclusion because it’s true – and very visual.
What happens when you assess performance on a monthly basis, comparing the months to each other over time? Are there some months in which the market performs better than others, over the long term?
Yes, based on my analysis of historical data of the S&P 500.
Here’s what I did: I pulled data (source: Yahoo Finance) showing the opening market value and the closing market value for each month, dating back 40 years. From there, I downloaded the results into an Excel spreadsheet, and ran pivot tables on the data.
I first assessed the years 2001-2010, in order to see if there was a discernable difference by month. Here are the results for these past 10 years:
As you can see, the “January Effect” seems to be, in reality, a drop into negative territory when you look at the past 10 years (note that January 2011 is not included here). However, March, April, and May have shown good performance. Additionally, November and December did quite well.
Interesting stuff. The most recent market performance over 10 years shows that some months have been better for the market than others.
After doing this, I thought that while 10 years is the most recent and possibly most relevant time frame, the analysis should be expanded a bit to include more years. So, I incorporated all of the data which I had pulled, and analyzed performance from 1971 to 2010.
Here are the results for a 40-year time period:
When the time period is expanded out to increase the sample size, it’s clear some months have shown better S&P 500 performance than have others. November to January seem to be good months, then March and April as well.
What about February, as well as the summer months? Performance in these months, over the last 40 years, has clearly lagged that of the aforementioned good times of the year. There’s a pronounced difference in prices, with February being a clear dip in the middle of good months, and September being the lowest point of multiple poor performing months. Keep in mind that these are averages, of course, so there could be individual years where performance could be all over the place.
But about those averages I just mentioned….is it worth considering these historical performance averages when making decisions to buy or sell stocks? I’m not an investment professional, so don’t take this as advice, just as my own analysis and thoughts. For me, it gets thoughts racing about a year-long strategy:
- Buy in February, with the intent of capitalizing on solid gains over the next few months.
- Sell in May, and take the summer off:)
- Buy again in October, after the September Swoon.
- Sell in January, and engage in profit-taking.
- Repeat Step 1.
Note that I’m not recommending a step-by-step approach like this. A year-long strategic plan like this is too much, and every year is different. The supporting data points are averages across time.
However, at the minimum, these trends are worth considering when making (or not making) buy and sell decisions. It’s compelling enough for me to consider that monthly historical S&P 500 performance data like this might tip the odds slightly in the favor of the informed investor, when he or she is considering when to buy and sell stocks.
The past doesn’t always repeat itself, but it’s important to learn from it to predict future behavior