As the calendar flips to November, the U.S. stock market is entering what has historically been its best performing six months of the year. Just like spring ushers in summer and after fall comes winter, the stock market has seasons and cycles too.
As you get ready to embark on your holiday shopping list, consider adding some new stocks and exchange-traded funds to your list too.
“After decades of historical research, we discovered that most market gains occur during the months November through April. Investing in the Dow Jones industrial average between Nov. 1 and April 30 each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950,” says Jeffrey Hirsh, editor of Stock Trader’s Almanac in Nyack, New York.
[See: 7 Ways to Avoid Financial Stress Over the Holidays.]
The stock market performance numbers are solid. Since 1950, the Dow is up 7.4 percent on average during the best six months November-April, while it is up only 0.4 percent during the worst six months May-October, Hirsch says.
Money and managers. The rationale for the seasonal strength can be traced to capital inflows and mutual fund manager window dressing, says Sam Stovall, chief investment strategist at CFRA, a New York-based equity research firm. Window dressing is a strategy used by fund managers to improve the appearance of their fund prior to quarter end, which includes selling losing stocks and buying top performers.
“Nobody wants to admit they own a dog,” Stovall says.
Capital inflows are in a positive support to stocks from January through April, Stovall adds.
“Most people tend to max out their 401(k)s during this time,” he says. “If they get a year-end bonus, it goes into the 401(k) or the stock market. IRAs must be funded by April 15. And, if people are due a tax refund from Uncle Sam they usually file early and some or all of it may be invested into stocks.”
Investors have become accustomed to positive returns during these six months, says Jim Davis, regional investment manager at U.S. Bank Private Client Group in Springfield, Illinois.
Of course, it is wise to remember there are no sure things.
“Seasonality trading is not a slam-dunk strategy as there can be negative returns during these months,” Davis says. “We believe the historical trend is significant in that seasonality shifts to a tailwind for the markets rather than a headwind.”
Upbeat outlook. This year the fundamental backdrop remains positive for stocks heading into the seasonal bullish period, Davis says.
“The economy is advancing at a modest pace and we expect employment and wage growth will be sufficient to support moderate economic growth into 2017,” he says. “Inflation remains restrained and interest rates will remain low, which helps support the current valuations on equity prices.”
Most of the major stock sectors are in play during the best six months, Hirsch says.
“Biotech logs the largest average gains, 14.25 percent but is up 70 percent of the time,” he says. “Consumer discretionary is up 10.69 percent, materials up 9.87 percent and industrials 9.28 percent and they have better win ratios all up 88 percent of the time.”
[See: 9 Blue-Chip Powerhouse ETFs to Buy.]
How can investors capitalize on the seasonal strength that may lie ahead? Hirsch offered his strategy.
“Our best months switching strategy will not make you an instant millionaire as other strategies claim they can do. What it will do is steadily build wealth over time with half the risk, or less, of a buy-and-hold approach,” Hirsch says.
ETF shopping list. Here is Hirsch’s fall shopping buying list: broad market averages ETFs including SPDR Dow Jones Industrial Average (ticker: DIA), SPDR S&P 500 ( SPY), PowerShares QQQ ( QQQ), and iShares Russell 2000 ( IWM). For sector plays, Hirsch likes iShares NASDAQ Biotech ( IBB), SPDR Consumer Discretionary ( XLY) and SPDR Consumer Staples ( XLP) and SPDR Materials ( XLB).
Hirsch says bonds, utilities, and gold stocks tend to underperform during the November-April time period.
“Bonds are usually inversely correlated to stocks. This year could be worse for bonds with another Fed hike expected after the election,” he says.
“Utilities make more money air-conditioning in the summer than heating in the winter. Basic physics — making heat is easy. Creating cold takes more energy,” he says. “Gold stocks run up ahead of big gold buying for the holidays and sell-off during the New Year.”
Also, investors should view the seasonal trend as a potential positive catalyst for stock prices but invest in accordance with current economic and market conditions, Davis says.
“Currently, we favor equities over bonds. This plays into the seasonal narrative,” he says. “We also think investors are best served by taking on a cyclical bias as we see inflation contained and economic growth modest. In this vein, the consumer discretionary, technology and healthcare sectors seem poised for outperformance.”
And, it pays for investors to be choosy when it comes to individual stock picks.
[Read: The Scariest Parts of Financial Planning.]
“Stock selection is likely to grow in importance in this environment and companies with exposure to e-commerce, cloud computing, the global consumer and health care should perform well,” Davis says.
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November to April Are the Best 6 Months in Stocks originally appeared on usnews.com
