Over the past 30 years, April has consistently been the best month of the year for US stocks. May through September, on the other hand, has seen lower, below-average returns, according to Andrew Sheets, Morgan Stanley’s Chief Cross-Asset Strategist. Also in 2020, financial markets soared in April after a sharp sell-off in March. In the same time frame, the NASDAQ increased by 14 percent, the S&P 500 increased by 12 percent, and the Dow Jones increased by 13 percent. April tends to outperform other months, according to Sheets, but will this be the case in 2021?
What is the significance of April?
For certain geographies, April marks the start of the new fiscal year, as well as the start of the earnings season for the January-March portion. According to Sheets, the most convincing explanation for April’s success is that during this time of year, a significant amount of money is returned to investors in the form of discounts, dividends, and tax rebates. Similarly, the money flow from discounts and dividends is drying up, which aids underperformance in the coming months.
“Summer also faces a very human issue: investors choose to take vacations during the summer. Some investors can sell a little to have less to worry about, and market liquidity tends to be a little worse with more people out of the office,” the market strategist said. Although none of these factors appear to be major concerns, they do affect returns. Also, financial markets have had a stronger month in April. Returns in April are typically 2% higher than normal, while returns in May through September are typically 1% lower. “Even so, every little bit counts and these tiny numbers add up over time,” Sheets said.
Is the year 2021 going to be the same?
Will the year 2021 follow the same path? While month-to-month market volatility is difficult to predict, Andrew Sheets believes a few items have fallen into place for April.
This earnings season should be solid, thanks to a low base from the previous year when the pandemic caused economic activity to plunge. Sheets said, “As a result, any year-over-year comparison is going to be extremely favorable.” Furthermore, he stated that April is likely to be the last month in which economic data is good but US core inflation remains below 2%, according to Morgan Stanley economists.
As we approach the summer months, things will become more difficult, with core inflation expected to rise above 2% and remain there. “As a result of the extremes of the April 2020 lows, the pace of change for economic data could also peak. Although we’re keeping an open mind, these variables might make the summer a little more difficult.”