Stock Market Performance by Intra-year Phase

The full-year Trading Calendar suggests that the U.S. stock market may have three phases over the calendar year, corresponding roughly to calendar year trading days 1-84 (January-April), 85-210 (May-October) and 211-252 (November-December). What are typical stock market returns and volatilities for these phases? Using daily S&P 500 Index closing levels from 1950 through 2011 (62 years), we find that:

The following chart summarizes average S&P 500 Index returns by phase over the entire sample period and three subperiods. Results generally confirm the conventional wisdom that stock market performance tends to be relatively weak during the middle part of the year. During the very recent subperiod since 2000, the early part of the year is also weak.

How about the variability of these returns?

The next chart summarizes standard deviations of S&P 500 Index returns by phase over the entire sample period and three subperiods. Results suggest that not only does May-October (November-December) tend to be a weak (strong) phase, it also tends to be the most dangerous (safest) in terms of variability.

What about a reward-risk combination?

The final chart summarizes the reward-risk ratio (return divided by standard deviation) for the S&P 500 Index by phase over the entire sample period and three subperiods. Results generally confirm the conventional wisdom that the stock market tends to perform well during the early months of the year, poorly during the middle months and very well during the final two months.

Again, during the very recent subperiod since 2000, the early part of the year is also weak.

In summary, evidence from simple tests supports some belief in the conventional wisdom that the middle (end) of the year tends to be the worst (best) time to invest in U.S. stocks.

Note that sample period and especially the subperiods are small for reliable inference. The subperiod since 2000 has only 12 observations. For example, excluding the single observation for May-October 2008 materially alters results for that phase for both the overall sample and the recent subsamples (but does not change the order of phase attractiveness).

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