When examined with a wide lens, the directional movement of the ageless Dow Jones Industrial Average (^DJI 0.40%), benchmark S&P 500 (^GSPC 1.02%), and widely followed Nasdaq Composite (^IXIC 2.02%) is a pretty clear "up." However, over shorter timelines, those lenses can get quite foggy.
Over just the trailing-two-year period, we've witnessed the Dow, S&P 500, and Nasdaq Composite rocket to record-closing highs, as well as plunge into respective bear markets. It's been a reminder for tenured investors, as well as a learning experience for those new to Wall Street, that short-term stock movements are unpredictable.
Nevertheless, history has shown that some periods are kinder than others to investors. While virtually nothing is guaranteed on Wall Street, 95 years of statistical data aggregated by sell-side consultancy company Yardeni Research finds that certain months are more likely to produce upside in the broader market, while others are commonly associated with weaker performance.
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These months have historically led to the biggest gains for investors
Being an optimist since 1928 has statistically paid off. Not only are the Dow and S&P 500 substantially higher than where they were 95 years ago, but the ratio of up years to down years has been decisively positive. The S&P 500 ended positive 64 times, compared to 31 negative years. (Note: The S&P officially came into existence in 1923 but didn't contain 500 components until 1957.)
However, four months stand out as being particularly strong. As of the end of May 2023, only four months have produced an average annual return of greater than 1% for the S&P 500:
- July: 1.7%
- April: 1.4%
- December: 1.3%
- January: 1.2%
The end of the year and the first few days of a new year are typically known as the "Santa Claus rally" period. Investor sentiment is usually rosy during this time, which may explain why stocks typically perform well in December and January.
As for why July is the best month of the year, it may have to do with index rebalancing undertaken in June. Getting outperformers into the S&P 500 while shedding the proverbial dead weight has the potential to provide a lift.
When the S&P 500 does end the month higher, July also takes the cake for the largest average gain. Of the 57 times July has ended in the green since 1928, the average gain has been a cool 5%. The next-closest month is April, with an average gain -- when ending positive -- of 4.3%.
But when it comes to the total number of times a month has ended positive, December is the likeliest to put a smile on investors' faces. Over 95 years, the S&P 500 has finished higher 69 times in December.
Image source: Getty Images.
Statistically, these are Wall Street's worst-performing months
But there's another side to this story. While July, April, December, and January have historically been kind to investors, another three months have, statistically, been a net negative for Wall Street.
Since 1928, the following are the only three months to produce an average annual loss for the S&P 500:
- September: (1.1%)
- February: (0.1%)
- May: (0.1%)
The most logical explanation for the weakness seen in February and May is profit-taking following historically stronger performances in December, January, and April. Meanwhile, September's poor performance may have something to do with the winding down of summer vacations and investors returning to the office. This "return" may be marked by investors locking in gains realized when trading volume was lower during the summer months.
However, if the S&P 500 ends a particular month lower, things change a bit. Since 1928, the largest average decline in down months for the S&P 500 is a tie between May, September, and October at (4.7%). A couple of large downswings on Wall Street, including the Black Monday Crash of 1987, occurred in October.
In terms of the total number of down months since 1928, September takes the unwanted crown. There have been 52 instances where the S&P 500 closed September lower, compared to just 42 positive finishes and one unchanged performance (September 1979). The next-worst month is February, with 50 positive closes and 46 declines.
This is the closest you'll get to a guarantee on Wall Street
Although historic data on Wall Street's monthly performances offer insight as to what periods of the year have proved fruitful or challenging for investors in the past, there's no such thing as a foolproof tool or indicator that's going to accurately predict the directional short-term movement in stocks.
But as pointed out earlier, things change drastically when you have a long-term mindset.
Every year, market analytics company Crestmont Research refreshes its dataset that examines the rolling 20-year total returns, including dividends paid, of the S&P 500. Since the components of the S&P could be found in similar major indexes prior to its creation in 1923, Crestmont was able to accurately back-test its dataset to 1900. This means it has 104 rolling 20-year periods of total return data (1919-2022) to work with.
The idea behind Crestmont's dataset is to show how much an investor would have made had they, hypothetically, purchased the S&P 500 -- or in this case, an S&P 500 tracking index -- and held that position for 20 years. The end result was a positive annualized return in 104 out of 104 rolling 20-year periods -- a 100% success rate. It's the closest thing you'll get to a guarantee on Wall Street.
To put these findings into perspective, it simply hasn't mattered if you were lucky enough to buy into the S&P 500 during a bear market low or piled in during a short-term peak. As long as you had held on to your position for 20 years, you would have generated a positive total return.
Regardless of short-term white noise or how well or poorly certain months have historically been for any of the market's major indexes (Dow, S&P 500, or Nasdaq), being patient and holding for the long run is, statistically, a path to riches.
