This bull market, which began on October 12, 2022, turned 4 earlier this month—despite some causes for concern. The specter of rising rates and persistently high inflation, for example, helped slow the market's momentum in August and September (the latter of which is historically the worst-performing month for US stocks). But stocks remain within striking distance of their all-time highs and the best 6 months calendar theory suggests that investors have reason to think the best may be yet to come.
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 about 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 who consider calendar-based investing trends continue to seek the best way to capitalize on the trend nonetheless.
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, 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 effect (when stocks have historically produced their weakest average returns) and January effect (when stocks have historically produced some of their best average returns).
What should you make of the best 6 months for stocks?
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. Additionally, with stocks having rallied so much this year already and over the past 4 years amid the current bull market, that could potentially make further gains in the coming months more difficult due to relatively 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 the recent rise in interest rates, stubbornly high inflation, and worries about the AI trade, all of which could put at risk 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.