April has historically been among the most friendly months for investors.
April has historically had a below average probability of yielding a negative return.
April historically represents a below average number of worst return months.
The winter has left us, well at least it should have done, April is here. Today, I will take a look at what we can expect from April from an investor view. Does spring bring joy for the markets or is the much-anticipated increase in sunlight not reflected in the stock prices?
April has become increasingly friendly to investors
To get straight to the point; April is certainly not bad for your equity investments. Since 1928, based on S&P 500 Index (NYSEARCA:SPY) data, April has generated an average positive return of 1.25%. With that return it ranks third, behind the more acknowledged December month, but just ahead of January which also has 'investor friendly' attached to it. July, however, holds top spot with an average positive return of 1.52%.
Now, of course things can change. To find out if April's 'behavior' has changed over time, I also calculate the average returns over shorter sub periods. I chose three, somewhat arbitrarily, from 1946, from 1970 and from 1991. The results are shown in the next three graphs below.
One thing gets clear when looking at these charts; over time April has become increasingly friendly to investors. It moved up from third place to second in the two sub periods starting in 1946 and in 1970 and actually became the number one return month in the period starting in 1991. Since 1991, April has produced an average return of 1.92%, beating even December, albeit by a small margin. So, based on the average returns over different time periods, April truly stands out as a good month for equities.
What about negative returns?
Let's take a look from another angle. While the historical average returns of the calendar months give a reasonable clue on what to expect, it does not tell the whole story. For example, a few, but big, positive returns in some years and weaker returns in many other years, could still result in a good average return, but the probability of actually hitting a good month is pretty low. Therefore, I also calculate the negative return hit ratio. Or, in other words, the historical probability of a calendar month yielding a negative return. To keep this article comprehensible, I only show the hit ratios for one sub period, from 1946 onwards. In this sub period, April scores second, this represents the middle of the positions it has taken during different sub periods (from third to first). The negative hit ratios are shown in the graph below.
The graph reveals some interesting results. Since 1946, 41% of all calendar months produced a negative return. But, for December, clearly the best month for equities since 1946, the hit ratio has been only 22%. Only one in five December months yields a negative return. But April also comes out well on this statistic. One in three April months has, historically, resulted in a negative return, comfortably beating the overall average of 41%. Moreover, the good score of April is confirmed in other sub periods. Since 1928, April was negative in 37% of the cases and in only 26% for the period starting in 1991. Both percentages are below the average for that sub period.
As a final step, I will focus on worst negative returns. How often is April represented when things get really ugly? To get a view on this, I calculated the share that each of the calendar months represents within a sample of the 50 worst monthly returns. Again, I primarily focus on the 50 worst returns of the sub period starting in 1946. The results are shown in the next graph.
April makes the top 50 of worst S&P 500 index returns four times, representing 8% of all 50 months. This is below the 8.3% (100%/12) average you would expect if the negative return months were equally distributed. But, while April's share in worst return months is just below the equal weighted average, it is less outspoken than April's score on average returns and the hit ratio for negative returns. This is quite different for December. It does not even once make the list of 50 worst returns.
To round up, April has historically been a good month for equity investors. And also one that has become friendlier through time. In the most recent sub period starting in 1991, April has become the calendar month with the best average return. Also investors have encountered relative few negative months when investing in April. Historically that is…
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.