Spooked by the Market? The Halloween Indicator Could Mean You’re in for a Treat.

Despite the hair-raising topsy-turviness of the market in recent months, there’s reason to hope the next several months could be a lot less frightening. 

Historically, global equity markets have produced higher returns between the first trading day of November and the last trading day of April compared with the year’s other half.

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For starters, stocks have already sold off significantly—with the S&P 500 down around 19% year-to-date and the Nasdaq Composite off around 30%. October is also traditionally a month when the biggest down markets have hit bottom. We’re also coming up on the third year of a presidential cycle, which is often positive for the markets.

In addition to these factors, there’s a fourth reason for investors to be bullish. It’s what’s known as the Halloween indicator. Historically, global equity markets have produced higher returns between the first trading day of November and the last trading day of April compared with the year’s other half.

Notably, the months November through April have brought an almost 3,000% cumulative return on the S&P 500 in inflation-adjusted terms since 1961. That’s according to Stifel, which points out that over the same duration, the months of May through October have had a cumulative return of only 14%.

The Halloween indicator has been a seasonal trend that dates back more than 100 years in the U.S., and more than 300 years globally, based on available historical data, says D.R. Barton Jr., chief investment strategist at risk analytics platform Finiac, formerly known as RiskSmith.

Often, but not always. Of course, it doesn’t always work. Between Nov. 1, 2021, and May 1 of this year, for example, the S&P 500 had a negative 10.3% return, Barton says. Meanwhile, between May and October this year, the S&P 500 had a negative return of about 6%, based on calculations prior to Monday’s market close. 

While the trend of November through April outforming May through October doesn’t seem likely to hold true for those two time periods in the past 12-months, the historical tendency coupled with the additional factors could make the next six months a particularly good time for investors to increase their stock market exposure. 

“It’s not true every year, but it’s been true more than 75% of the time,” Barton says. “It’s gotten stronger over time and has the potential to continue along that path.” 

As with any seasonal trend, investors need to be mindful of outside factors that weigh heavily on stocks. This year, for instance, the Ukrainian War and inflation tripped up the seasonal indicator, Barton says. But over the long-term, there’s evidence to suggest having exposure to the market during these next six months and less exposure during the rest of the year, could be more fruitful than a traditional buy-and-hold strategy, he says. 

To be sure, proponents of conventional buy-and-hold investing also have a quiver in their bow, since staying fully invested also has proven a profitable long-term strategy, according to insights about the Halloween indicator published last year by J.P. Morgan Wealth Management.

There’s also the tax factor to consider, since holding on to positions for less than a year subjects investors’ profits to higher tax rates, J.P. Morgan pointed out in its insight to clients. “The higher taxes might negate the slightly higher return one gets from timing the market according to the Halloween indicator,” the firm wrote.

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