November is typically the best month for stocks. A quirk among mutual funds may explain the weird phenomenon and point to big gains into year's end (2024)
Matthew Fox
·3 min read
Talk of stock market seasonality tends to pick up towards the end of the year, and for good reason.
Since 1950, November has been the strongest month of the year for stock market performance.
These patterns have played out perfectly so far this year, with the S&P 500 falling 5% in September, and rising 4% in the first few days of November.
A number of theories have tried to explain the stock market's seasonality. For example, bad Septembers have been attributed to cooler weather depressing sentiment among traders as well as the end of summer vacations on Wall Street driving increased selling.
For the year-end strength, one theory is that the spread of holiday cheer (and increased spending on gifts by consumers) encourages more buying than selling in stocks. This is often dubbed the "Santa Claus rally."
But there's one driver of stock rallies that is less anecdotal and has more concrete evidence to back it up: a quirk in the tax code for mutual funds.
Specifically, mutual funds have until October 31 to make their tax-loss harvesting trades for the year, three months before the deadline for retail investors. Tax-loss harvesting is a trading strategy to lower tax liability.
"Tax loss harvesting for institutional investors became increasingly prevalent after the Tax Reform Act of 1986, which mandated October 31 as the cut-off for most mutual funds to realize capital gains," Bank of America's Savita Subramanian explained in a note last year.
This can have a big impact on markets considering that US mutual funds manage more than $20 trillion in assets across stocks and bonds.
Loss harvesting involves selling a stock that has suffered year-to-date losses, then waiting 30 days to buy it back to avoid the wash-sale tax violation. Mutual funds can then use those realized losses to help lower their tax liability when they sell winning stocks in the future.
"We've historically seen evidence of tax loss selling by institutional investors in October (peak outflows), and by retail investors ahead of the December 31 cut-off for individual investors. Flows for both groups have typically reversed in subsequent months," Subramanian explained.
And it's that reversal that can help drive stocks higher into the end of the year, especially when there are a lot of year-to-date losers, like in 2023. While the S&P 500 is up about 14% this year, about half the companies in the index are down, and over a third are down more than 10%.
These tax-loss candidates have a tendency to move higher after October 31, which can ultimately help lift the broader stock market.
"Since 1986, stocks down 10% or more from January 1 to October 31 beat the S&P 500 by 1.9 percentage points on average over the next three months with a 70% hit rate," Subramanian said.
With mutual funds' tax-loss selling now in the rearview mirror, there could be upside pressure to stock prices as mutual funds start to buy back the shares they sold just a few weeks ago, which plays right into the bullish year-end seasonality.
A quirk among mutual funds may explain the weird phenomenon and point to big gains into year's end. Talk of stock market seasonality tends to pick up towards the end of the year, and for good reason. Since 1950, November has been the strongest month of the year for stock market performance.
What is the best time to invest in Mutual Funds? There is no rule of thumb or fixed criteria to state the best time for investing in mutual funds. While a bear market may look like an ideal time to invest in mutual funds, the identification of a bear market entirely depends on the expertise of the fund manager.
According to Reuters, since 1945, April and December are tied as the best-performing months of the year for stocks, with an average return of 1.6%. (September is notoriously the worst, with an average loss of -0.6%.) During recessions, April's positive performances can be even more pronounced.
For the year-end strength, one theory is that the spread of holiday cheer (and increased spending on gifts by consumers) encourages more buying than selling in stocks. This is often dubbed the "Santa Claus rally."
With all these factors taken into consideration, the best time of day to trade is 9:30 to 10:30 am. The stock market opens for trading at 9:15 AM and in the first 15 minutes, the market is still responding to the previous day's news with experienced traders waiting to make their move.
Stock prices tend to fall in the middle of the month. So a trader might benefit from timing stock buys near a month's midpoint—the 10th to the 15th, for example. The best day to sell stocks would probably be within the five days around the turn of the month.
Nobody can predict the market movements. Hence, instead of focusing on timing the market, one should be disciplined and should keep on investing in equity mutual funds irrespective of the market fluctuations. In the long term, these short term fluctuations do not affect your investments.
The Dow Jones Industrial Average rallied over 2,898 points (+9.15%) last month finishing November at a new high for the year. The Dow-30 is up 10.72% YTD. The Nasdaq Composite surged 10.83%, its strongest monthly gain since July 2022.
What is true about October is that it traditionally has been the most volatile month for stocks. According to research from LPL Financial, there are more 1% or larger swings in October in the S&P 500 than in any other month in history, dating back to 1950. September, not October, has more historical down markets.
One of the historical realities of the stock market is that it typically has performed poorest during the month of September. The "Stock Trader's Almanac" reports that, on average, September is the month when the stock market's three leading indexes usually perform the poorest.
Based on what happened in 1994, prognosticators then were forecasting a weak year for stocks in 1995. But stock prices soared in 1995--arguably, the best year in history.
With all these factors taken into consideration, the best time of day to trade is 9:30 to 10:30 am. The stock market opens for trading at 9:15 AM and in the first 15 minutes, the market is still responding to the previous day's news with experienced traders waiting to make their move.
Some traders follow something called the "10 a.m. rule." The stock market opens for trading at 9:30 a.m., and the time between 9:30 a.m. and 10 a.m. often has significant trading volume. Traders that follow the 10 a.m. rule think a stock's price trajectory is relatively set for the day by the end of that half-hour.
The Dow-30 gained 4.93% last month and rose 13.09% in Q4. The Nasdaq Composite surged 44.64% in 2023, its best year since 2020. The index rose 5.58% in December, capping a 13.79% fourth quarter gain.
Introduction: My name is Horacio Brakus JD, I am a lively, splendid, jolly, vivacious, vast, cheerful, agreeable person who loves writing and wants to share my knowledge and understanding with you.
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