Is there a Halloween effect on the markets?

The Halloween effect is surprisingly powerful says Adrian Lowcock, investment director at Architas. He explains what it is and how you can benefit.

Is there a Halloween effect on the markets?

The six month effect, also known as the ‘Halloween effect’ in the US, is a variation of the Sell in May adage and it is a surprisingly powerful trend.  The premise is that the six months from 1 November to 30 April are the best performing six months of the year for stock markets, outperforming the summer months of May to October.

Over the past 22 years, since 1995, the FTSE All Share has returned 167% between November and April, six times more than the May to October period which saw a total return of 26.97%. On average, the FTSE All Share returned 8.38% in the November to April period compared to 1.34% in the May to October period.

A global phenomenon

Not only is the trend real, but it occurs across major global equity markets. The chart below shows the average returns in the six months from November to April compared to the subsequent six months.

Whilst the six month or Halloween effect is more commonly known in the US, it is actually in Japan and Europe which see the largest differences. Japan shows the largest difference returning an average of 11.75% more in April to November followed closely by Europe with 10.99%.

Halloween markets

Source: FE Trustnet / Architas. Data from May 1995 to April 2017 for UK, Europe, US and Japan. Asia data starts May 1999 and Emerging Markets from May 2001.

As is always the case with any adage there are exceptions to every rule and the six month effect does not happen every year. Some of the most notable exceptions in recent times have been the dotcom bubble in 1999/2000, 2003 as tensions rose ahead of the US invasion of Iraq and more recently the fallout out the global financial crisis continued to hit stock markets in 2008/09.

Does seem to exist

The curious thing about the six month effect is that no-one has worked out exactly why it may be happening. There are a number of potential reasons: companies and fund managers are more active in the winter months as the end of the calendar year approaches and they may need to improve their figures. Christmas tends to be good times for markets as investors are generally more positive.

Also the last few months of the financial year end tend to be amongst the most active as investors use up their tax allowances, and take out an ISA or SIPP before the annual allowances are gone.

Whatever the cause, the six month effect does seem to exist, and whilst it is probably not a good idea to take it to extremes and hold cash for six months of the year, the end of October and start of November might be a good time to make any new investments into your ISA or pension, instead of waiting until the end of the tax year having missed out on the potential benefits of the six month effect.

 

Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change.

 

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