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The Best Months for Stock Market Gains

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The Best Months for Stock Market Gains

Many investors believe that equity markets perform better during certain times of the year.

Is there any truth to these claims, or is it superstitious nonsense? This infographic uses data gathered by Schroders, a British asset management firm, to investigate.

What the Data Says

This analysis is based on 31 years of performance across four major stock indexes:

  • FTSE 100: An index of the top 100 companies on the London Stock Exchange (LSE)
  • MSCI World: An index of over 1,000 large and mid-cap companies within developed markets
  • S&P 500: An index of the 500 largest companies that trade on U.S. stock exchanges
  • Eurostoxx 50: An index of the top 50 blue-chip stocks within the Eurozone region

The percentages in the following table represent the historical frequency of these indexes rising in a given month, between the years 1987 and 2018. Months are ordered from best to worst, in descending order.

RankMonth of YearFrequency of Growth (%)Difference from Mean (p.p.)
#1December79.0%+19.9
#2April74.3%+15.2
#3October68.6%+9.5
#4July61.7%+2.6
#5May58.6%-0.5
#6November58.4%-0.7
#7January57.8%-1.3
#8February57.0%-2.1
#9March56.3%-2.8
#10September51.6%-7.5
#11August49.3%-9.8
#12June36.7%-22.4
Average59.1%n/a

There are some outliers in this dataset that we’ll focus on below.

The Strong Months

In terms of frequency of growth, December has historically been the best month to own stocks. This lines up with a phenomenon known as the “Santa Claus Rally”, which suggests that equity markets rally over Christmas.

One theory is that the holiday season has a psychological effect on investors, driving them to buy rather than sell. We can also hypothesize that many institutional investors are on vacation during this time. This could give bullish retail investors more sway over the direction of the market.

The second best month was April, which is commonly regarded as a strong month for the stock market. One theory is that many investors receive their tax refunds in April, which they then use to buy stocks. The resulting influx of cash pushes prices higher.

Speaking of higher prices, we can also look at this trend from the perspective of returns. Focusing on the S&P 500, and looking back to 1928, April has generated an average return of 0.88%. This is well above the all-month average of 0.47%.

The Weak Months

The three worst months to own stocks, according to this analysis, are June, August, and September. Is it a coincidence that they’re all in the summer?

One theory for the season’s relative weakness is that institutional traders are on vacation, similar to December. Without the holiday cheer, however, the market is less frothy and the reduced liquidity leads to increased risk.

Whether you believe this or not, the data does show a convincing pattern. It’s for this reason that the phrase “sell in May and go away” has become popularized.

Key Takeaways

Investors should remember that this data is based on historical results, and should not be used to make forward-looking decisions in the stock market.

Anomalies like the COVID-19 pandemic in 2020 can have a profound impact on the world, and the market as a whole. Stock market performance during these times may deviate greatly from their historical averages seen above.

Regardless, this analysis can still be useful to investors who are trying to understand market movements. For example, if stocks rise in December without any clear catalyst, it could be the famed Santa Claus Rally at work.

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Investor Education

How MSCI Builds Thematic Indexes: A Step-by-Step Guide

From developing an index objective to choosing relevant stocks, this graphic breaks down how MSCI builds thematic indexes using examples.

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Title text says “How MSCI builds thematic indexes” and funnel is pictured with the following labels from top to bottom: global parent universe, relevance filter, and false positive control.

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The following content is sponsored by MSCI

How MSCI Builds Thematic Indexes: A Step-by-Step Guide

Have you ever wondered how MSCI builds its thematic indexes?

To capture long-term, structural trends that could drive business performance in the future, the company follows a systematic approach. This graphic from MSCI breaks down each step in the process used to create its thematic indexes.

Step 1: Develop an Index Objective

MSCI first builds a broad statement of what the theme aims to capture based on extensive research and insights from industry experts.

Steps 2 and 3: List Sub-Themes, Generate Keyword List

Together with experts, MSCI creates a list of sub-themes or “seedwords” to identify aligned business activities. 

The team then assembles a collection of suitable documents describing the theme. Natural language processing efficiently analyzes word frequency and relevance to generate a more detailed set of keywords contextually similar to the seedwords.

Step 4: Find Relevant Companies

By analyzing financial reports, MSCI picks companies relevant to the theme using two methods:

  1. Direct approach: Revenue from a company’s business segment is considered 100% relevant if the segment name matches a theme keyword. Standard Industrial Classification (SIC) codes from these directly-matched segments make up the eligible SIC code list used in the indirect approach.
  2. Indirect approach: If a segment name doesn’t match theme keywords, MSCI will:
    • Analyze the density of theme keywords mentioned in the company’s description. A minimum of two unique keywords is required.
    • The keyword density determines a “discount factor” to reflect lower certainty in theme alignment.
    • Revenue from business segments with an eligible SIC code, regardless of how they are named, is scaled down by the discount factor.

The total percentage of revenue applicable to the theme from both approaches determines a company’s relevance score.

Step 5: Select the Stocks

Finally, MSCI narrows down the stocks that will be included:

  • Global parent universe: The ACWI Investable Market Index (IMI) is the starting point for standard thematic indexes.
  • Relevance filter: The universe is filtered for companies with a relevance score of at least 25%.
  • False positive control: Eligible companies that are mapped to un-related GICS sub-industries are removed.

Companies with higher relevance scores and market caps have a higher weighting in the index, with the maximum weighting for any one issuer capped at 5%. The final selected stocks span various sectors. 

MSCI Thematic Indexes: Regularly Updated and Rules-Based

Once an index is built, it is reviewed semi-annually and updated based on:

  • Changes to the parent index
  • Changes at individual companies
  • Theme developments based on expert input

Theme keywords are reviewed yearly in May. Overall, MSCI’s thematic index construction process is objective, scalable, and flexible. The process can be customized based on the theme(s) you want to capture.

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Learn more about MSCI’s thematic indexes.

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