Optimal Stock Performance: The November-April Advantage By: Stock Market Charlie

Key Takeaways

• Get excited for the best rolling 6 months for stocks, from November through April!

• Active investors, seize the opportunity to explore a sector rotational strategy into cyclicals!

• Stay alert, as trade disputes, government shutdowns, geopolitical conflicts, and more could impact these thrilling seasonal trading patterns!

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Is the market primed to blow its top off with stocks at record highs? History suggests a resounding yes, particularly when examined through the lens of the “best 6 months” calendar theory. This theory posits that certain months of the year have historically been more favorable for stock market performance, leading many investors to consider timing their investments accordingly.

Historical data reveals that the most advantageous rolling 6-month period for stocks typically commences in November and concludes in April. As we approach the end of the notoriously volatile month of October—known for its unpredictability, with the S&P 500 exhibiting a standard deviation of monthly returns that has been 33% greater than the average of the other 11 months since 1945—investors should keep several key considerations in mind as we transition into this historically lucrative segment of the year for equity markets.

Best 6 months for stocks

This calendar trend, popularized by the Stock Trader’s Almanac, is closely tied to the well-known “sell in May and go away” investment strategy. Historical analysis indicates that the best rolling 6-month period for stocks occurs from November to April, during which time equities significantly outperform their performance in the subsequent 6-month period. Since 1945, the data supports this assertion:

• The S&P 500 has delivered an average price return of approximately 7% from November to April, in stark contrast to just over 2% from May to October, highlighting the pronounced seasonal disparity in market performance.

• The Russell 2000, which represents small-cap stocks, has exhibited even more pronounced seasonal strength, averaging returns of around 9% during this optimal 6-month window, underscoring the potential benefits of investing in smaller companies during this period.

This calendar theory traditionally suggested that investors should remain invested during these favorable 6 months and then strategically exit their positions in May, effectively "going away" until the market conditions improved in November. While this specific seasonal trading strategy may not be as widely adhered to in contemporary investing practices, many investors are still keen to explore ways to capitalize on the historical trends associated with the calendar.

Numerous studies have sought to unravel the reasons behind the consistent outperformance of the stock market from November through April. Some hypotheses include the phenomenon of year-end portfolio rebalancing, which could lead to increased capital flowing into stocks, the holiday season’s inherent optimism that often correlates with heightened consumer spending, and the influence of election cycles where November elections may sway investor sentiment and expectations regarding government policies, among other factors. Each of these elements contributes to the complex tapestry of market behavior.

However, it is important to note that no single definitive explanation has emerged, which is why the best 6 months phenomenon is often regarded as a calendar anomaly, akin to other well-documented effects such as the September and January effects that also exhibit unusual market behavior.

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What should you make of the best 6 months?

Critics of investment strategies based on the best 6 months and the sell in May adage highlight some notable flaws inherent in these approaches.

Firstly, these calendar trends are fundamentally grounded in historical averages, and there has been considerable variability in stock performance from year to year. For instance, the S&P 500 achieved remarkable gains of over 15% from May 2024 through October 2024 and has seen nearly 18% growth from May through late October of the current year, defying the historical expectation of underperformance during this timeframe. Furthermore, these gains were predominantly driven by cyclical sectors, which are often more volatile and responsive to economic changes.

This leads to another significant challenge: the current environment, characterized by a substantial rally in stock prices over the past three years amid an ongoing bull market, raises concerns about the sustainability of further gains, especially given the elevated valuations that many stocks are currently experiencing. Investors may find it increasingly difficult to achieve the same level of returns as seen in the past, particularly when stocks are already trading at high multiples.

Moreover, the advent of technology and the increasing influence of globalization have somewhat diminished the predictability of seasonal trading patterns. Market timing has proven to be an elusive endeavor, and shifting market dynamics can render historical trends less relevant. Contemporary issues such as trade disputes with China and other nations, geopolitical tensions in various regions, and concerns surrounding a potential AI-driven market bubble all pose significant risks that could adversely impact the historical tendency for stocks to outperform during the upcoming 6-month period.

Sector rotation strategy

Long-term data consistently indicates that a buy-and-hold investment strategy often outperforms seasonal trading strategies. However, for those who actively manage a portion of their investment portfolio, some market analysts suggest that a seasonal rotation strategy may warrant consideration.

According to research from the stock market analysis firm CFRA, cyclical sectors such as consumer discretionary, industrials, materials, and technology have historically outperformed during the best 6 months of the year. In contrast, defensive sectors like utilities and health care tend to lead the market from May to October, highlighting the potential for strategic sector rotation based on seasonal trends.

As we approach this upcoming favorable segment of the calendar, investors might consider increasing their exposure to cyclical sectors, particularly in light of the ongoing advancements in artificial intelligence, which have significantly bolstered technology, industrial, and materials stocks. This proactive approach could position investors to capitalize on the anticipated performance during the best 6 months.

Regardless of the strategy you choose to adopt, it is crucial to avoid basing your entire investment approach solely on calendar trends like the best 6 months. Given the potential for rising market risks and the ever-changing economic landscape, it is advisable to approach these calendar patterns with a discerning perspective and not lose sight of the broader market fundamentals that ultimately drive stock performance.

Best Regards,

Stock Market Charlie