Is the market primed to blow its top off with stocks at record highs? History says yes, according to the “best 6 months” calendar theory.
Historical data shows that the best rolling 6-month period for stocks begins in November and ends in April. With the volatile month of October nearing its end (since 1945, the S&P 500’s standard deviation of monthly returns in October has been 33% greater than the average for the other 11 months), here’s what investors could keep in mind as we enter the historically best part of the year for stocks.
Best 6 months for stocks
Popularized by the Stock Trader’s Almanac, this stock market calendar trend is related to the “sell in May and go away” calendar theory of investing. Historical data shows that, not only is the best rolling 6-month period for stocks November through April, but also that stocks far outperform during this part of the calendar compared with the remaining 6 months. Since 1945:
- The S&P 500 has delivered an average price return of roughly 7% from November to April, compared to just over 2% from May to October.
- The Russell 2000 (representing small-cap stocks) has shown even greater seasonal strength, averaging 9% returns during the best 6-month-window.
This calendar theory used to suggest being invested during these best 6 months and then to sell in May and go away from May through October. While this precise seasonal trading theory is no longer in vogue, investors have been attempting to figure out the best way to capitalize on the calendar trend nonetheless.
Many studies have attempted to pin down why exactly there has historically been greater stock market performance from November through April. Some reasons put forth include year-end portfolio rebalancing that could result in more cash going into stocks, holiday optimism associated with higher consumer spending during the holiday season, and election cycles where November elections potentially influence investor sentiment and government policy expectations, among other causes.
However, no definitive explanation exists—hence why the best 6 months is considered a calendar anomaly, much like the September and January effects.
What should you make of the "best 6 months"?
Skeptics of investing strategies built around the best 6 months and sell in May theories point out some obvious flaws.
First and foremost, these calendar trends are based on historical averages. Indeed, there has been significant variability from year to year. For example, the S&P 500 gained over 15% from May 2024 through October 2024 and has gained nearly 18% this May through late October, defying historical norms for the market to underperform relative to the best 6 months. Additionally, those gains were largely made by cyclical sectors (more on this shortly).
This brings up another hurdle, which is that with stocks having rallied so much this year already and over the past 3 years amid the current bull market, that could potentially make further gains in the coming months more difficult due to high valuations.
Moreover, not only have technology and globalization reduced seasonal trading patterns to some extent, market timing can be difficult and changing market dynamics can render historical trends moot. Consider trade disputes with China and other countries, geopolitical tensions in several parts of the globe, and worries about an AI-driven market bubble all having the ability now to threaten the historical proclivity of stocks to outperform over the next 6 months.
Sector rotation strategy
Long-term data shows that buy-and-hold investing often outperforms seasonal strategies. However, if you actively manage a portion of your investment mix, some market researchers suggest that a seasonal rotation strategy might be worth a look.
According to stock market research firm CFRA, cyclical sectors like consumer discretionary, industrials, materials, and technology tend to outperform during the best 6 months (while defensive sectors such as utilities and health care tend to lead from May to October).
You could consider leaning into cyclical sectors during this upcoming part of the calendar. In today’s market, that might mean you remain bullish on the artificial intelligence buildout that has propelled technology, industrial, and materials stocks in particular.
Regardless of what approach you take, you would not want to shape your strategy around calendar trends like the "best 6 months". And with some market risks rising, you may want to take calendar trends with more than the usual grain of salt.