The S&P rose nearly +13% in September and October – historically the two worst market months – but the best is likely yet to come: November is historically the second best month in market history (April is #1) and November is also the start of the best three months and the best six months of the market year. In addition, we saw a dramatic shift in Congress this week, which points toward a strong market year ahead.
First, let’s look at November. Since 1950, the S&P 500 has risen an average +1.6% each November. The last 20 Novembers are even stronger. Since 1990, the S&P has risen in 14 Novembers, while falling only six times, for an average gain of +2.0%, including +6.5% last November and +8.6% in 2001, post 9/11.
November gets even better in election years. As The Almanac Investor says, “Election year Novembers rank #1 for the Dow and S&P” while “Midterm Election Novembers team with October for a helluva one-two punch, an +8.5% two-month NASDAQ gain.” Mid-term election Decembers are positive, too: In the 15 mid-term election years since 1950, the S&P 500 rose an average +4.5% in November and December.
The Best Three Months: November 1 to January 31
November 1, is also the start of the best three months of the year. Since 1950, the months of November, December and January average a combined +4.57% return (a 19.6% annual rate). There is some logic behind this seasonal surge. A number of bullish trends converge around holiday time, as fourth-quarter revenues begin rising with a Thanksgiving surge, then a Santa Claus Rally, followed by a January Effect.
Each year, holiday rallies seem to start earlier, making October a decent month in the last 20 years. As this chart shows, the fourth quarter has been consistently positive for a long time. The fourth quarter is the only calendar quarter that has risen in all three months, on average, over the last 20, 50 and 100 years.
The Best Six Months: November 1 to April 30
The market doesn’t stop rising in January, of course. After a generally slow February, the market warms up in March and positively soars in April, the best month of the year. Since 1950, nearly all market gains have come in the six cold months (November to April), while the six warm months were virtually flat.
According to The 2010 Stock Trader’s Almanac, the average gain from November 1 to April 30 (since 1950) was +7.3% per year, while the average gain from May 1 to October 31 was just +0.1%. This trend has given rise to the unfortunate advice to “sell in May and go away.” On the surface this makes sense. But if you had followed that advice in 2009, you would be hurting. In 2009, this formula would have cost you a -10% loss in the early part of the year, while robbing you of an +18.7% gain in the second half.
The Best 12 Months: After Mid-Term Elections
The clincher of the calendar cycle is the big switch in Congress this week, as we move from a one-party monopoly to split powers – or gridlock, the real “change investors can believe in.” In the 12 months after all previous mid-term elections (since the 1930s) there has been a huge and sustained market surge. Here are the 12-month Dow gains in the last 15 mid-term election years (since 1950), averaging +18.4%…
Market Gains from November 1 to October 31: After Mid-Term Elections
- 1950-51 +16.6%
- 1954-55 +29.2%
- 1958-59 +19.0%
- 1962-63 +28.1%
- 1966-67 +9.0%
- 1970-71 +11.0%
- 1974-75 +25.6%
- 1978-79 +2.9%
- 1982-83 +23.5%
- 1986-87 +6.2%
- 1990-91 +25.7%
- 1994-95 +21.7%
- 1998-99 +24.9%
- 2002-03 +16.7%
- 2006-07 +15.3%
- Average +18.4%
Notice how these gains are consistent, even in the last three cycles, when the market has been net flat. If we merely achieve the average post-midterm election gain of +18.4% in the next 12 months, the Dow will surge to over 13,000 and the S&P 500 will be over 1400 by next October. In addition, the market usually gains over 20% when the changes in Congress are most dramatic, so 2011 could deliver over +20% gains.
As we’ve said often in recent months, the third year of the four-year election cycle (2011 this time around) has been the strongest year by far, gaining an average +17.13% since 1945 – more than all of the other three years of the four-year Presidential cycle combined. This makes for an exciting bullish convergence in the closing months of a mid-term election year, going into the strong Year 3 to follow.
