Third strongest month of the year

April is one of the most interesting months for the stock market. Five years ago April was the strongest month for the market in the year, but it is now ranked third. On average the market rises 1.8% in this month; and the probability of a positive return in the month is 68% based on its recent track record. From 1971 the market rose in April every year for 15 years – a recent record for any month. Although the number of years with negative returns in the month has been increasing lately.

The accompanying chart plots the percentage performance of the FTSE All Share Index for each April since 1980. For example, last year in 2012 the market fell 0.6% in April. As can be seen, apart from 1990, the market falls rarely in April and when it does the extent tends to be limited.

The market often gets off to a strong start in the month – the first trading day of April is the second strongest first trading day of all months in the year.

Sectors

The following table summarises analysis of the historic performance of sectors in this month.

End of the strong half of the year

From a seasonality viewpoint, the great significance of April is that it the last month in the strong part of the six-month cycle. This is the very odd characteristic whereby the stock market in the period November to April greatly outperforms the May to October market (hence the saying, “Sell in May and go away…”).

In the 30 years since 1982 the winter period has out-performed the summer period 25 times, with an average annual out-performance of 9.1 percentage points! The behaviour is extraordinary and should not exist in a modern, efficient(ish) market. But exist it does. Indeed, a similar effect also exists in most other stock markets, including the US.
For investors impressed with this phenomenon (and it is difficult not to be), the end of April is the time to sell out, or reduce exposure to the equity market.

Diary

On the economic front, the MPC will make its interest rate announcement at 12 noon on 4 April (do you remember the old days when interest rates actually moved and those changes had an effect on the market?)

Finally, in the trivia corner, April marks the anniversary of the introduction of the FTSE 100 Index (on 1 April 1984) and of the first time the index closed over the 6000 level (1 April 1998).

Article first appeared in Money Observer.