‘Tis The Season For Strong Stock Market Returns

‘Tis The Season For Strong Stock Market Returns
Carl Hazeley

about 2 years ago2 mins

  • US stocks have historically performed much better between November and April than between May and October.

  • The difference is even starker for certain US stocks: small caps, high beta, and low volatility.

  • So buying US stocks now could be a good bet, but to hedge yourself, you could also buy put options on the country’s stocks.

US stocks have historically performed much better between November and April than between May and October.

The difference is even starker for certain US stocks: small caps, high beta, and low volatility.

So buying US stocks now could be a good bet, but to hedge yourself, you could also buy put options on the country’s stocks.

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There’s an old investing adage that goes “sell in May and go away, and come back on St Ledger’s Day” – which, if you’re not familiar, falls in September. And it’s not actually far wrong: US stocks – especially particular groups of stocks – do tend to perform better between November and April…

Why would you sell in May?

Looking at data since 1926, the S&P 500 has risen an annualized 7.2% between May and October, compared to 13.6% between November and April.

Source: Leuthold Group.
Source: Leuthold Group.

There are some seasonal reasons for this, including how optimistic investors are early in the calendar year. That tends to be boosted by companies’ reporting of annual results, as they set out positive forecasts for the year ahead.

But what might be more interesting is that this long-standing trend suggests there are bigger gains to be made than simply by buying the S&P 500 at the right time.

Where are there bigger gains to be made?

Buying US small caps – perhaps via the iShares Russell 2000 ETF (expense ratio 0.19%) – would’ve historically earned you just 2.4% between May and October, but 21.1% between November and April.

Source: Leuthold Group.
Source: Leuthold Group.

Low volatility stocks, meanwhile, would’ve earned you 8.9% between May and October and 13% between November and April. One way to buy into those in the US is via the iShares MSCI USA Min Vol Factor ETF (expense ratio: 0.15%).

Source: Leuthold Group.
Source: Leuthold Group.

And high beta stocks – those that tend to rise or fall by more than the rest of the market on average – would historically have lost you an annualized 0.3% between May and October, but returned 23.1% between November and April. Invesco’s S&P 500 High Beta ETF (expense ratio: 0.25%) offers exposure in that regard.

Source: Leuthold Group.
Source: Leuthold Group.

What’s the opportunity here?

There are two ways to play this. First is by investing in US stocks, either as a whole via an S&P 500 ETF or by buying up particular groups that should rise by more than the average through April. And although the seasonality I mentioned above isn’t exactly a secret, it typically repeats year in, year out anyway, which means the “sell in May” pattern is a self-fulfilling prophecy more often than not.

The second way to play this is to make a contrarian bet against the trend continuing. After all, if everyone’s expecting something to happen and it’s “priced in” to markets, there’s profit to be made if it doesn’t pan out. Now, I’m not suggesting that you actively “short” US stocks – a risky endeavor with potentially limitless losses. But you could buy “put options” that, for a small upfront fee, give you the right to sell US stocks at a certain price, setting you up to profit if they fall.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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