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Stock Market Seasonality by Month

Seasonality in stock prices has been documented and shown to hold true for many decades, and in this blog post we go over what months are the best and worst for the stock market overall.

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Seasonality in the stock market refers to the tendency of stock prices to follow a certain pattern during specific times of the year. This pattern is due to a combination of factors such as investor behavior, economic indicators, and holiday season. For example, stocks tend to perform better in the months leading up to Christmas as consumers spend more during the holiday season.


On the other hand, stocks may experience a decline in the summer months when investors go on vacation and economic activity slows down. It is important for investors to be aware of seasonality patterns in the stock market as it can help inform their investment decisions.


However, it is also important to note that seasonality is not a guarantee and can be influenced by other factors such as market trends, global events, and company-specific news. As such, seasonality should not be the sole basis for investment decisions and should be considered alongside other factors such as company performance and market conditions.


Average Stock Market Returns by Month


The S&P 500 index, which represents 500 large US companies, has historically seen some fluctuations in performance throughout the year. Generally speaking, the stock market performs better in the latter half of the year, with the best months being November to April.


This is known as the "Santa Claus" rally, where stock prices tend to rise due to increased consumer spending during the holiday season and positive investor sentiment. On the other hand, the summer months of May to October have historically been the worst for the stock market. This is often attributed to factors such as a slowdown in economic activity, investors going on vacation, and a lack of significant news and events during these months.


Below is a chart showing the average monthly returns for the S&P 500 index for each calendar month from 1950 to 2017. We can see that historically December delivers the best returns with an average of 1.60% and September is the worst with minus 0.50% average returns.


Other Seasonal Patterns Present in the Stock Market


Below is a list of some other well-known seasonality patterns in the stock market.


  1. January Effect: Historically, the stock market tends to perform well in the first month of the year, particularly with small-cap stocks.

  2. Summer Doldrums: As mentioned, the summer months tend to be a period of lower performance for the stock market.

  3. September Blues: September is often considered one of the worst months for the stock market, potentially due to market uncertainty and a lack of investor participation during the summer months.

  4. Election Year Effect: The stock market tends to perform better in election years, with the latter half of the year being particularly strong.

  5. Back-to-School Effect: The stock market tends to see a slowdown in performance in August as investors focus on back-to-school preparations and vacations.

  6. Post-Election Rally: The stock market tends to perform well in the months following a presidential election, regardless of the election outcome.

  7. Holiday Season Effect: As previously mentioned, the holiday season generally sees a rise in stock prices due to increased consumer spending and positive investor sentiment.


One of the most talked about seasonal patterns in the stock market is the "Santa Claus Rally". The Santa Claus rally refers to the tendency of the stock market, particularly the S&P 500 index, to see a rise in performance during the last five trading days of the year and the first two trading days of the New Year. This pattern is named after the popular holiday figure Santa Claus and is a well-known seasonal trend in the stock market.


The Santa Claus rally is often attributed to several factors, including positive investor sentiment during the holiday season, increased consumer spending, and the tendency of portfolio managers to buy stocks before year-end to improve the appearance of their portfolios. Additionally, many investors who have realized gains earlier in the year may choose to sell their losing positions before year-end for tax purposes, which can contribute to upward pressure on stock prices.


It is important to note that while the Santa Claus rally has been a relatively consistent pattern in the stock market, it is not a guarantee and can be influenced by other factors such as market trends, global events, and company-specific news. Furthermore, the magnitude and duration of the Santa Claus rally can vary from year to year and may not always occur.


Conclusion


As you can see there's a number of well-known seasonal effects evident in the stock market and some months perform better than others. You may not be aware, however there is also seasonality present in individual stocks in addition to the wider market.


If you want to incorporate seasonality into your trading and investing, then check out our custom Seasonality Indicator. With it, you can see right on your chart what any stock or other asset is expected to return over the next X number of days. You can choose how many days for the indicator to give you a seasonal forecast and using historical data it will show you how that stock performed over the next X days.


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