Stock market seasonal trends: When is the best and worst time to invest in stocks?
15:38, 2 September 2022
Blackberries are a summer fruit, while pears are harvested in autumn, and if you thought that the stock market couldn't be affected by seasonality, or recurring patterns in the returns, you were wrong.
Based on the historical performance of the past fifty years, we discovered that there are seasonal trends on the stock markets that occur during certain months of the year.
To analyze seasonality trends in the stock market we used the following metrics:
- Average returns by month: This is the average of all historical returns in a month. It provides information regarding the performance of the index during a particular month.
- Gain frequency by month: This statistics is obtained by dividing the number of positive returns in a month by the number of observations in that month. This provides an indication of the historical probability that a positive performance was observed during a particular month of the year.
How does the S&P 500 (US 500) index perform during the year? How do other major stock indices fare when the S&P 500 drops or rises? Why do seasonal trends exist in other equity indices like the US Tech 100 (US 100), the Dow Jones (USA 30) or the German DAX (DAX 30) ?
We answered these questions and discovered some fascinating findings.
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Major stock market indices: seasonality trends – Monthly average returns
Equity market indices average historical returns by month – Photo: Capital.comMajor stock market indices: seasonality trends – Monthly gain frequency
Equity market indices gain frequency by month – Photo: Capital.comSeptember is the worst month for the stock market
Starting off or with bad news, September is the worst month for the stock market. When you think of September, you immediately recall the collapse of Lehman Brothers on September 15, 2008, but this event did not have a significant impact on the seasonality trend observed over the past 50 years. Even after removing this event from the analysis, the S&P 500 and other major stock market indices posted a negative performance in September.
September is the only month in the past 50 years in which the S&P 500 (US 500) index recorded a negative average return (-0.8%).
In September, the S&P 500 (US 500) index gained only 45% of the time, the lowest gain frequency of the year. Other major US stock market indices, such as the Dow Jones (USA 30) and the US Tech 100 (US 100), fell by -0.9% and -0.5%, respectively, in September.
No major advanced country equity index demonstrates a positive historical average return in September. European stock indices – German DAX (DAX 30), Eurostoxx 50 (EU 50) and UK FTSE 1000 (UK 100) – as well as the Japanese Nikkei 225 (J225) index were also weak in June and August.
Among the main stock indices of major advanced countries, the German DAX (DAX 30) shows the worst average performance in September (-1.7%).
November, December and April are the best months for the stock market
"Sell in May and go away... but remember to return for Halloween" is an old saying that seems to be hold true when it comes to stock market seasonality.
While September is a typical risk-off month, equity markets tend to rally in November, December and April. The latter, in particular, shows the highest average returns for the major stock indices of advanced countries.
In these months of the year, the S&P 500 (US 500) index grew by an average of 1.4%, 1.3% and 1.6%, respectively. The percentage of times the S&P 500 (US 500) index has recorded positive returns is also very high, 68%, 74% and 71% of cases respectively.
The US Tech 100 (US 100) did even better than the S&P 500 in terms of average returns in November (2.2%), December (1.5%) and April (1.6%).
The same goes for the Dow Jones (USA 30), which grew 1.4%, 1.5% and 2.1%, respectively, as well as the German DAX (DAX 30).
The strongest seasonality in the main advanced country stock indices is found in the UK FTSE 1000 (UK 100) in April (+2.3%).
Economic factors affect September’s seasonality in stock markets
The economic cycle's seasonality may explain why stock markets fall in September.
September is traditionally a slow month for retail sales in the United States, as consumers tend to cut back on their discretionary spending and increase the amount savings at the end of the summer.
When compared to the previous month, the ISM Services PMI, which is a leading survey among private sectors’ managers on the economic outlook, typically shows a weak performance in the month of September.
Economic cycle seasonality – Photo: Capital.comS&P 500 outperforms in ODD years vs EVEN years, as political risks play a role
S&P 500 outperform in ODD years, as political risks weigh on EVEN years – Photo: Capital.comBelieve it or not, the stock market hates even-numbered years and loves odd ones.
Over the last 50 years, the S&P has returned on average only 3.9% in even years and 13.1% in odd years, against an overall yearly return of 8.4%.
What factors influence the outperformance of odd years over even years in the S&P 500 index?
It has to do with politics, specifically with the increased political uncertainty that occurs during election years in the United States, both for the presidency and for the midterm elections, which always take place in even years.
During election years in the United States there is a lack of clarity regarding the economic policies that will be prioritized as investors do not know which political party will hold majorities in Congress.
S&P 500 hates mid-term election years
Mid-term election years, in particular, scare the stock market the most, due to the higher risk of a legislative gridlock, when one party controls Congress and the other the White House.
Historically, the S&P 500 has only returned 0.7% on average during years with mid-term elections, and seven out of twelve monthly returns have been negative on average.
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