Two periods are notable each year for U.S. equity market strength. The first spans the months of November and December, benefiting from strength in business and consumer spending prior to the end of the year. The second period spans the months of March and April. What are the prospects for March and April this year?
The most profitable consecutive two month period for the S&P 500 over the past 50 years has been March and April. The large cap index has averaged gains of 2.73 per cent per period between March 1 and April 30. Profitable results were achieved in 36 of the past 50 periods.
The two-month rally in March and April concludes the seasonally strong six month period during the year when the majority of equity gains for the year are generated. Over the past 50 years, the S&P 500 index has averaged gains of 6.61 per cent per period between November and April versus an average gain of 0.90 per cent between May and October.
Strength in equity markets in March and April is prompted by a series of annual recurring events. Warmer weather following the winter months leads to a recovery in economic activity, particularly in manufacturing and consumer spending. Consumers typically buy everything from new clothes to new cars to new homes in the spring, leading to seasonal strength in the retail, household appliance, furniture, and automobile industries. In addition, investors tend to take a bullish stance prior to the first quarter earnings report season in mid-April. First quarter results for most companies are usually released just prior to annual meetings when chief executive officers frequently announce dividend increases, share buy-backs, and upbeat guidance for the year.
Another reason for strength in U.S. equity markets in April is contributions into Individual Retirement Account (IRA) plans. U.S. investors can contribute to their IRA plan until April 15 based on their taxable income in the previous year. Contributions into an IRA plan frequently are made in anticipation of tax refunds that start to flow in volume by late April. At least some of these contributions are recycled into equity markets.
What about this year? The bar for expectations of favourable first-quarter results by U.S. companies has been lowered. Analysts have recently reduced first-quarter earnings and revenue estimates due to the negative impact of colder and snowier weather in the U.S. Northeast. As a result, upside surprises are easier to achieve.
Sectors that perform best in the months of March and April include economically sensitive sectors such as industrials, consumer discretionary, materials, energy, and financials. Strength relative to the S&P 500 recently has surfaced in the Consumer Discretionary Select Sector SPDR ETF (XLY), the Materials Select Sector SPDR ETF (XLB), and the Energy Select Sector SPDR ETF (XLE).
Don and Jon Vialoux are authors of free daily reports on equity markets, sectors, commodities, and Exchange Traded Funds. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com. They also are Research Analysts for Horizons ETFs Management (Canada) Inc. All of the views expressed herein are their personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons ETFs Management (Canada) Inc.