Sunday 27 October 2013

The Best & Worst Months for Shares

In Jeremy Siegel's book "Stocks for the Long Run", it was mentioned that the best month for stocks is January while the worst month for stocks is September. October, although not the worst month, is the most volatile, having witnessed the stock market crashes of 1929, 1987 and more recently 2008. Let's review the case for Singapore to see if Singapore's stocks follow the same pattern.

The table below shows the average monthly return for the Straits Times Index based on data for the past 24 years since 1988 (2013 is excluded as there are still 2 more months to go).

Calendar Month Average Return Standard Deviation No. of
Best Months
No. of
Worst Months
No. of Best - Worst Months
Jan 0.8% 7.3% 5 2 3
Feb 0.9% 7.0% 2 1 1
Mar 0.5% 5.1% 0 1 -1
Apr 2.7% 6.5% 3 0 3
May -0.3% 7.6% 2 5 -3
Jun 0.2% 6.4% 2 1 1
Jul 1.6% 4.3% 3 1 2
Aug -2.9% 6.5% 0 5 -5
Sep -1.1% 7.1% 2 4 -2
Oct 1.0% 9.2% 1 4 -3
Nov 1.6% 5.6% 1 1 0
Dec 2.8% 4.9% 4 0 4

Based on the average monthly return, the best month is actually December at 2.8% while the worst month is August at -2.9%. However, if based on the no. of times that month has the best return in a calendar year, the best month is January with December not far behind. August remains the worst month. It is interesting to note that August was never the best month in any year. Similarly, December was never the worst month in any year. Based on the standard deviation of the monthly returns, October is the most volatile at 9.2% while July is the least volatile at 4.3%.

Hence, from the above analysis, Singapore stocks exhibit similar trends to US stocks, with December/ January being the best month while August/ September being the worst and October being the most volatile. The similarity in patterns should not be surprising, since stocks between US and Singapore are closely correlated.

From the last column of the table, it can also be seen that there is a sequence of positive returns from December to February. Similarly, there is a sequence of negative returns from August to October. Hence, there appears to be some sense in the adage "sell in May and go away".

Personally, do I follow calendar months when buying or selling shares? Actually not really. It is only a secondary consideration. The key consideration is still asset allocation and individual share performance. For example, if I intend to sell shares and January is around the corner with shares rising, I would wait till the end of January before selling. Sometimes, I might even wait till the end of February. Similarly, if I intend to buy shares and September/ October is around the corner and shares are falling, I would wait till the end of October before buying.

However, calendar effects do not always happen. Take this year for example. At end August, shares were falling due to widespread concerns that Fed might start to taper their Quantitative Easing (QE) programme. Shares dropped by 6.0% in that month. Given this backdrop, I would assume that the selling trend would continue into September and October. However, Fed did not taper QE against all expectations. Shares rose by 4.6% in September. Till yesterday, shares are up by 1.2% for October. So, calendar effects do not always happen.

In conclusion, there are certain months and quarters when shares are likely to perform better and certain months and quarters when shares are likely to perform worse. It is useful to know this information when buying or selling shares, but don't bet on it.

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