Now, we could go in all sorts of directions with this article. There actually is a month that historically has been the best month to buy stocks in. More on that later. We do have decades of stock market data to draw from. But that begs the question why don’t we all just buy stocks in the months that have proven to be winners? One of the first things we do learn about investing is that previous performance is not indicative of future performance. The S&P 500 could go up every December for forty straight years, but there is no guarantee it will in the forty-first year.
So what determines a good month to buy stocks? There are actually several factors that we can take a look at that are constant throughout the year. It also depends which industry the stock is in, as well as any macroeconomic factors that could be impacting the market environment. So while there really is one month that stands above the rest, let’s also dissect which other months would be good, and bad, for buying stocks!
You might find different results from different sources here. While it has been shown that November is the best month for the stock market, there are others that say April is. As usual, the answer lies somewhere in the middle.
The November supporters actually have a larger dataset as research usually goes back to about 1950. The April supporters are simply measuring the return of the benchmark S&P 500 since 2000. You can probably see why it is confusing to use these two data points. They are more or less arbitrary points in time, and might not be the most accurate measure.
November usually sees higher gains because of what comes before and after. Historically, the period between September and October has been a downward trending period. So naturally, if you get a big pullback in the broader markets, the rebound will be more impressive.
From November into the turn of the year, stocks usually rally so it makes sense that we would see higher returns. Choose whichever side you wish, but the general consensus is that either April or November are the best months to buy stocks.
What About the Santa Claus Rally?
For those that have heard of the Santa Claus Rally, you might be thinking December would be the best month to buy stocks. While it is true that stocks tend to rally through December and into January, most of the gains are made from November onwards. Is the Santa Claus Rally legitimate? Well, at one point the markets rallied during that period in 34 out of the past 45 years. That’s a decently high rate for something to be coincidental.
There are several theories as to why the Santa Claus Rally actually happens. One is that most market makers and hedge fund managers are on holiday during those weeks. Another is that institutions are re-shuffling their funds for the end of the year and tend to buy more stocks. Others point to technical analysis and some even point to company bonuses that are usually dumped into the stock market. Whatever the case may be, the Santa Claus Rally is a very real phenomenon, making December another one of the best months to buy stocks.
New Year, New Stocks?
Well, what about January then? A fresh start to the year must be a fine time for investors to buy stocks. Maybe they made some New Year’s resolutions around putting money away into investments.
Or maybe they made some extra money by timing the November bull run into the Santa Claus Rally! I understand why people would assume this, but historically January has been a fairly even and uneventful month for stocks.
January is also the first month of a new quarter for those companies that follow the calendar for their fiscal years. Institutional investors will be looking to shuffle around the investments in their funds.
Does that lead to greener markets? Not necessarily. Funds will also be dumping stock as well so those actions should more or less even themselves out. Another historical trend is that people don’t have a lot of money after the holiday season.
January is for re-assessing their checkbooks, and toning down the spending after what has traditionally been the high season for the retail industry.
So make sure to put stocks on your watch list ahead of time. That way you can keep an eye on when they’re moving. And then you can take advantage of moves in January.
Or you can get a clearer idea of where stocks could be headed for the short term.
As you know there are four quarters to each fiscal year. Generally, in the last month of each quarter, companies report their earnings. These earnings calls are very important catalysts that set the tone for the stock for the upcoming quarter. Stocks often experience increased volatility around earnings season. It’s difficult to predict how they’ll behave. This is why our first bad months for buying stocks are the four months of earnings season.
Which months are they? December, March, June, and September. I know we just said December is a good month, but the Santa Claus Rally is usually reserved for the last week in December. Earlier in the month, there’s often high volatility before and after earnings calls. If you bought low enough in October or November, then you might just feel confident enough to ride those stocks through to January.
September’s generally thought of as one of the worst months for stocks. There are legitimate numbers to back this up as well. It’s not just because fund managers are grumpy that summer is ending. Since 1950, the Dow Jones has lost an average of 0.8%. The S&P 500 has lost an average of 0.5% during September. When you consider that this is almost a seventy-five-year period, that’s an impressive statistic. Avoid September at all costs!
March has actually been fairly positive throughout history. The S&P 500 has returned an average of 0.8%. This is a bullish month compared to June which provides an average return of only 0.06%. Now obviously these aren’t set in stone. Just look at 2020 when the COVID-19 pandemic saw the S&P 500 drop by 13% in March. Every year will have its own set of challenges. By no means should you use this as a black and white rule for buying stocks.
The Dog Days of Summer
We already talked about September as one of the worst months to buy stocks, but August isn’t much better. As the end of summer approaches, the stock markets seem to fall alongside the temperatures.
August has seen an average loss of 0.16% for the S&P 500 during the month. Again, 2020 was an anomaly here, as the bull run for the market was just getting started.
August of 2020 saw a 6.45% rise during the month, the highest single return from the S&P 500 since 1950. Remember two key market-moving events that happened last August: the high profile stock splits of both Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA). These types of catalysts can have an overpowering effect on the markets and can easily buck historical trends.
In general though, August and September are months where you can just steer clear of the markets. Perhaps it is the stock market’s way of telling us to get out and enjoy the sun while it is still around.
So there you have it. If we go by historical trends, there are certainly months that are better and worse for buying stocks. April and November are the months that have seen the strongest returns from the S&P 500 index. Part of November’s performance is due to the fact that from August through to October, the markets are generally in a downtrend. This presents an excellent time to buy low in November, which has also led to the Santa Clause Rally into the end of the year.
The New Year isn’t as lucrative a time to invest as you would think. Historically, January has been a good month for the S&P 500. Many believe in a phenomenon called the January Effect, where investors have perceived prices will rise during January. This is another theory as to why the Santa Clause Rally happens so prevalently from year to year. Finally, some months to avoid when buying stocks tend to be the four months where companies are reporting quarterly earnings. Another time to get out of the markets is the end of summer, particularly as August leads into September. This isn’t an argument to blindly buy in April and November, and sell in September. But there are historical trends that point to certain months being better, and worse, for buying stocks.