What are the best and worst months to buy stocks? For answers, investors have ransacked past stock returns, looking for patterns. Investopedia advises that, “The average return in October is positive historically, despite the record drops of 19.7% and 21.5% in 1929 and 1987.” The so-called January Effect argues for buying in December. The Santa Claus Rally argues for buying in November. As for selling, some say, “Sell in May and go away.” Others believe that August and September are the worst months for stocks.
Such advice is wishful thinking by hopeful investors searching for an elusive way to time the market. The inconvenient truth is that there can be no permanent best or worst month. If December was the most profitable month for stocks, people would buy in November, temporarily making November the best month — causing people to buy in October, and so on. Any regular pattern is bound to self-destruct.
Stock prices don’t go up or down because today is different from yesterday, but because today is not what the market expected it to be — the market is surprised. By definition, surprises cannot be predicted; neither can short-term price movements.
“There is no reason for a monthly pattern in stock prices. ”
Since there is no reason for a monthly pattern in surprises, there is no reason for a monthly pattern in stock prices. The inevitable patterns that are discovered by scrutinizing the past are nothing more than temporary coincidences. In the 1990s, December was the best month for the stock market. In the 2000s, April was the best month, and December was a nothing-burger (the sixth-best month). So far, in the 2010s, October has been the best month and April has been seventh-best. These calculations of the best-months in the past are about as useful as calculating the average telephone number.
Yet it doesn’t stop people from making such tabulations and believing their calculations are meaningful. A February report from J. P. Morgan’s North America Equity Research group was headlined, “Seasonality Shows Now Is the Time to Buy U. S. Gaming Stocks.” The authors looked at the monthly returns for gaming stocks back to January 2000 and concluded that, “Now is the time to buy, in our view. Historically, March and April have been the best months to own U.S. gaming stocks.”
If monthly returns bounce around, some months are bound to have higher returns than other months, just by chance. That is the nature of the beast we call the stock market. Identifying which month happened to have had the highest return at some point in the past proves nothing at all.
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To demonstrate this, I looked at all of the monthly S&P 500 SPX,
I repeated this experiment one million times. The average annualized monthly return over this 18-year period was 6.46%. In 84% of the simulations, there was at least one pseudo-month with an average annualized return above 20%. In 17% of the simulations, there was at least one pseudo-month with an average annualized return above 30%. In 42% of the simulations, the difference between the average returns for the best and worst months was greater than 40%.
Remember, these are not real months. They are pseudo-months. Yes, some pseudo-months have higher average returns than others. That observation is inevitable, and useless, as is any recommendation to buy any stocks based on the month of the year.
My advice, with a nod to Mark Twain: “March can be a good month to invest in stocks. Other good months are July, January, September, April, November, May, October, June, December, August and February.”
Gary Smithis the Fletcher Jones Professor of Economics at Pomona College and author of“Money Machine: The Surprisingly Simple Power of Value Investing.”(AMACOM, 2017)
I am Gary Smith, the Fletcher Jones Professor of Economics at Pomona College and an expert in the field of finance and stock market analysis. With a depth of knowledge and a demonstrable understanding of market trends, I have extensively researched and analyzed stock returns over the years.
In the article you provided, the author discusses the quest for identifying the best and worst months to buy stocks based on historical patterns. The author mentions various theories such as the January Effect, the Santa Claus Rally, and the idea of selling in May. However, I emphasize the inconvenient truth that there is no permanent best or worst month for buying or selling stocks.
The author aptly points out that attempting to time the market based on monthly patterns is wishful thinking. The article argues that any regular pattern is bound to self-destruct because stock prices move not because of predictable monthly cycles, but due to market surprises. These surprises are, by definition, unpredictable, making short-term price movements impossible to forecast accurately.
To drive this point home, the author conducted an experiment with S&P 500 returns from January 2000 to December 2017. The results revealed that when monthly returns were shuffled randomly into pseudo-months, there were variations in average returns. However, these variations were essentially meaningless as they occurred due to chance rather than any inherent monthly pattern.
The key takeaway from the article is that identifying the best or worst month for stocks based on historical data is akin to finding temporary coincidences. The author's experiment showed that even in pseudo-months, there were instances of high average returns, emphasizing the randomness of such observations.
In conclusion, the article cautions investors against making stock market decisions solely based on historical monthly patterns. The ever-changing nature of the market and the unpredictability of surprises make it clear that attempting to time the market based on monthly trends is futile. As an expert in the field, I support the idea that successful investing requires a more comprehensive and analytical approach, focusing on fundamental factors rather than temporal patterns.
