Why November to April Might Be the Best Time to Invest in the Stock Market
By Randall W. Forsyth
Photograoh by Mark Wilson/Getty Images
From the worst of times, relatively speaking, the stock market ought to be heading into its very best of times. That is, if history is any guide in this period without precedent.
How lousy October was for stock investors depends on which yardstick one uses. Most Barron’s readers feel their losses in dollars, so the $2.4 trillion drop in the value of U.S. common equities, by Wilshire Associates’ reckoning, probably hits closest to home. In percentage terms, last month’s drop of 7.29% in the Wilshire 5000 was the biggest since September 2011.
What made October especially painful was that there were few places to hide. Long-term Treasury securities historically have provided a buffer for equities, but as this column has pointed out (most recently a few weeks ago), there has been a regime change between the two asset classes. Instead of rallying as it has in the past when stocks have swooned, the 30-year Treasury bond suffered a 5.36% negative return, according to Ryan Labs.
Bianco Research, which first put forth the regime-change hypothesis, observes that investors have tried to replace the shock absorbers of bonds with lower-volatility stocks. That hasn’t been entirely successful, however, as Evie Liu reported last week.
To be sure, global stock markets have labored against a number of notable headwinds, notably the Federal Reserve’s tightening of monetary policy, via both interest-rate increases and contraction of the central bank’s balance sheet, plus escalating trade tensions between the U.S. and China. But from the standpoint of the calendar, U.S. equities are entering what historically has been their most profitable period.
It should come as no surprise that politics plays a big part of it. The midterms will be blessedly over after Tuesday, and history says that stocks do better in the aftermath of these elections.
According to data compiled by Yardeni Research, the S&P 500 has been up in the 12 months following every midterm election since the middle of the last century, with gains from 1.1% in the post-1986 vote stretch (which included the Oct. 19, 1987, crash) to 33.2% in the year after the 1954 election.
That positive pattern appears to relate more to the four-year presidential cycle, however. The span from the fourth quarter of the second year of an administration through the first and second quarters of year three has been the best nine-month period for the Dow Jones Industrial Average in presidential cycles dating back to 1896, according to a report by John Lynch, LPL Financial’s chief investment strategist, and Jeffery Buchbinder, LPL’s equity strategist.
The final quarter of year two of a presidential term, the one we’re in, averaged a 4% return for the Dow. That was followed by gains of 5.2% and 3.6% in the two subsequent quarters. They ascribe this pattern to tendencies of presidents to boost the economy with pro-growth policies ahead of the elections in the fourth year.
As for the party in control of the executive and legislative branches, history also is on the side of the bulls. The combination of a Republican president and a split Congress—the most likely outcome from Tuesday’s elections, with the Democrats widely predicted to win the House of Representatives, and the Republicans favored to retain control of the Senate—resulted in an average annual return of 15.7% for the S&P 500 since 1950, the second-best among the permutations, according to the LPL note. The best mix for stocks is a Democratic president and a GOP Congress. That has produced an 18.3% annual return, a record heavily aided by the 1990s dot-com bubble. In either case, those outcomes support the conventional wisdom that Wall Street likes gridlock.
Even without the impact of Washington politics, the stock market has entered the best six months of the year. November marks the start of what might be called the flip side of the hoary “sell in May” notion, according to the pattern famously first described by the Stock Trader’s Almanac.
Looking back to 1950, the publication found that if you had invested $10,000 in the Dow only during the six-month periods from Nov. 1 to April 30, and sat out the other six months, you’d have amassed $1,008,721 through 2017, a 7.5% average return. If you had done the opposite and been invested in the Dow from May 1 through Oct. 31 and out of the market the other (profitable) six months, your $10,000 would have grown to just $11,031, or a mere 0.6% average return.
That this simplistic, semiannual calendar pattern should persist is intellectually unsatisfying. Jeffrey Hirsch, the Stock Trader’s editor in chief, responds that the model’s success might reflect the fact that many mutual funds’ fiscal years end on Oct. 31, which means they sell losing positions for tax reasons ahead of that date.
But he mainly insists that humans behave in repeatable patterns, which accounts for recurring market tendencies. That’s even so now, when so much trading is controlled by computers, he contends, because people construct the algorithms that run the machines.
There have been notable exceptions to bullish November-April patterns, including in 1970, in the wake of the U.S. invasion of Cambodia during the Vietnam War; the 1973 OPEC oil embargo; and the 2008 financial crisis. And given the lack of precedent for the current political climate, past results are no guarantee of future returns, to coin a phrase.
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