An infinite number of factors affect the stock market, from macro-economic trends to politics to the introduction of new technology. Yet, year after year, some of the same months always seem to experience better than average market performance.
While market experts offer a variety of explanations for why some months tend to be better than others for stock investing, one thing is clear: not every month is the same when it comes to buying and trading stocks. In this guide, we’ll highlight the best month to buy stocks based on historical trends.
Ready? Let’s dive in!
Should You Try to Time the Market?
Before we dive into analyzing when to buy and sell stocks, which months are outperforming, and which months are underperformers, it’s important to consider a fundamental question: should you try to time the stock market at all?
There are reasons why market timing can be a good idea and why it might not be worth it. The main argument for timing stock investments is that it can lead to bigger returns. After all, if you can trade stocks when they’re lowest and sell when they’re highest, your portfolio will likely perform better than investors who buy whenever it suits them.
However, it’s important to be realistic about how well you’ll time the market. Professional traders and fund managers who spend every day watching stock markets can rarely outperform the major indices consistently.
If you mistime the bottom or top of the market, you could end up losing money or missing out on potential gains. It’s also worth noting that trying to time the market can be more work than simply investing on a set schedule.
Historically Strong Months for Buying Stocks
If you want to time your investments, one simple way is to focus on months that have traditionally been the best-performing months for the market over many years. In other words, study past stock market data.
Over the period from 2000 to 2020, the best-performing month in the stock market has been April. The S&P 500 has returned an average of 2.40% in April alone over the past 20 years. Even if we go back to 1980, April is still the strongest month – the S&P 500 has grown an average of 1.97% in April over the past 40 years.
Based on 2000 to 2020 data, the next best months for fair stock prices are October and November. The S&P 500 has jumped an average of 1.17% over the past 20 October and 1.08% over the past 20 November. Going back to the 1980s, the market has grown by 1.13% and 1.55% during these two months.
January and December are also historically strong months. At the beginning of the year, investors return to the stock market with a bang, leading to the January effect. This pushes up prices, especially for small-cap and value stocks like mutual funds.
Since 1980, the S&P 500 has grown on average by 1.07% in January and by 1.22% in December. However, these months have underperformed in the last 20 years, with January seeing returns of –0.28% and December 0.50%.
Why have these months been strong? Several theories include a holiday shopping bump from November to December. So at the end of December, many investors sell stocks en masse, especially if they depreciated in value.
In addition, April is when many companies release first-quarter earnings and set guidance for the year. However, it’s important to remember that some of this seasonality is likely due to chance, and historical averages don’t mean that a specific month will be bullish every year.
Historically Weak Months for Buying Stocks
There are historically strong months for the stock market, but there are also traditionally weak months when stock markets tend to drop. You’ve probably heard the saying “sell stock in May and go away,” although it turns out that May has historically produced gains for the S&P 500.
Over the past 40 years, the weakest month to buy stock has been September, with an average return of –0.52% for the S&P 500. June and August are the next worst months as stock prices tend to dip. These months have 40-year average returns of 0.28% and –0.08%, respectively.
To some extent, this summertime weakness could be because the “sell in May” sentiment is self-fulfilling. If enough bulls sell at the beginning of the summer – in June as opposed to in May – it leaves bears firmly in control of the market until the fall. Then, when bulls return in October, the rush of buying activity pushes up the market.
Best Times of Day for Buying or Selling Stock
When the trading day starts, market volumes and prices of stocks tend to go high. This is because during the opening hours of day trading, the stock market factors in events and news releases since the last closing bell. This results in volatile prices, a fact many investors, especially newbies are unaware of.
Skilled professional day traders recognize the appropriate patterns and know when to begin trading to make quick profits. Therefore, if you have zero investing experience, avoid trading during this period of increased volatility to prevent bad news. But if you are a seasoned trader, the first 15 minutes after the opening bell is prime time.
The time between the first and last hours (middle of the day) is relatively stable enough to conduct your trading activity. Most traders like this time as the action is slower and it offers positive returns. So beginners can place trades within this time.
There’s volatility build-up in the last hour of the day, with the price volume rising. So, avoid making your biggest trades at this time.
Best Day of the Week to Buy Stocks
Just as there are best months to buy stocks, there’s the best day of the week too. Many traders and institutional investors believe certain days of the week systematically offer better returns than others. But there’s little data analysis or evidence to back this belief.
However, many investors believe that in the absence of a financial crisis, the first day of the workweek is best for buying stocks. They call it the Monday effect or the weekend effect. Some traders think stock prices tend to drop on Monday because of bad news released over the weekend.
Others think investors are in a foul mood because they have to return to work. Whatever the reason for the belief, the Monday effect has largely disappeared. In 2018, Monday on average had marked negative returns for the S&P 500, but the impact was very small.
Despite this, if you intend putting money into individual stocks, it’s best to do it on Monday rather than any day of the week. Then, you may get some stocks at bargain prices.
Conclusion: Best Month to Buy Stocks
Timing the market can be challenging, but knowing what months have historically produced the biggest gains can help. For example, if you’re waiting for the perfect time to invest, April, October, November, December, and January are historically the strongest months for the S&P 500.
Also, bear in mind that the economy and government’s fiscal and monetary policy play a key role in the best time to buy stock in a calendar year. Lastly, seasonal effects also affect when to buy stock. It results from retail sales, summer commodities harvest, and the build-up to the Christmas selling period.