Many readers will have heard of the saying “sell in May and go away”, implying some seasonal weakness in stockmarkets over the summer. On the flip-side, the general consensus is that markets do well during the final quarter of the year – a ‘Rudolph rally’ into the Christmas period.
In this week’s blog, I look at average stockmarket returns by month and whether there’s any evidence of these trends.
Stockmarket returns by month
This first chart shows the number of ‘up months’ (i.e. where there was a positive return during the month in question) vs ‘down months’ for the MSCI World index (a suitable proxy for the global stockmarket), since the start of 1999.
The orange line shows the net move (‘up months’ minus ‘down months’). For example, focussing on January – since the start of 1999, there have been 13 ‘up months’, 12 ‘down months’, for a net score of 1.
As you can see, the months of March, August and December have historically seen the greatest number of positive returns, whereas May and September have seen the lowest. I’d also note that Q4 in general has been favourable – October, November and December have each seen positive returns more than two-thirds of the time.
The second chart shows the actual average returns per month:
The above chart shows a similar pattern to the previous one– September has historically seen relatively weak performance (average -1.4%), whereas the final quarter has been strong.
For reference, the average annual return over this period has been around 8% pa (excluding adviser and platform charges).
So, on this very (very!) basic analysis, there does seem to be some support that returns are seasonally weaker during the summer and then pick up into year-end.
Investment risks: When investing, your capital is at risk. The value of your investment (and any income from them) can go down as well as up, and you may get back less than you invested, particularly where investing for a short timeframe (we normally recommend a horizon of at least 5 years). Neither simulated or actual past performance are a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Planning opportunities
The key point is that we would absolutely not advocate trying to game these trends, for example, coming out of the market in May and going back in at the end of September. There definitely isn’t enough ‘statistically significant’ data to support this and, if there was, it would have already been exploited.
Also note, historically, markets have still gone up during this period, just not as much as other parts of the year.
However, I do think the analysis supports our preference for regular investment throughout the course of the tax year vs lump-sum at the end of it.
This is particularly true in regards ISA contribution. Some investors prefer to use some/all their £20,000 annual ISA allowance ‘in one go’ just prior to tax year-end. But this could mean investing a sizeable sum ahead of the typically weak summer period.
In contrast, by regularly investing throughout the course of the year, this provides scope for so-called ‘pound cost averaging’ when markets are temporarily (or seasonally) weak, and more 'skin in the game' for any subsequent rebound. It also reduces your susceptibility to market volatility, resulting in a smoother returns profile.
Disclaimer: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require in order to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
