April marks the beginning of the new financial year for some geographies and also sets the ball rolling for the earnings season for the January-March quarter.
April has been the best month of the entire year for the US stocks, consistently for the last 30 years. On the other hand, May through September have generally seen lower, below-average returns, said Andrew Sheets, Chief Cross-Asset strategist for Morgan Stanley. Even in 2020, just after the sharp sell-off witnessed in March, stock markets skyrocketed in the month of April. NASDAQ zoomed 14%, S&P 500 jumped 12%, and the Dow Jones soared 13% in the same time period. Sheets added that April has the tendency to outperform other months but, will 2021 be the same?
April marks the beginning of the new financial year for some geographies and also sets the ball rolling for the earnings season for the January-March quarter. However, the most compelling reason for April’s performance, according to Sheets is that quite a bit of money comes back to investors in the form of coupons, dividends and tax rebates around this time of year. Similarly, the underperformance that follows in the coming months, is helped by the money flow, out of coupons and dividends, drying up.
“Summer also faces a very human problem – investors tend to take a vacation. Some investors probably sell a bit so they have less to worry about, and with more people out of the office, market liquidity tends to be a little bit worse,” the market strategist said. While both these reasons don’t look like major issues, but actually do impact returns. Even global markets see better performance in the April month. Returns in April tend to be about 2% better than average, while the returns in May through September are about 1% worse. “Still, every little bit matters, and over time, these small numbers can make a difference,” Sheets said.
Will 2021 be the same?
But, will 2021 tread on the same path? Although month-to-month market movement can not be easily pinpointed, Andrew Sheets believes there are a few things that have lined up correctly for April.
This earnings season could be strong on the back of a low base of the previous year where we saw economic activity plummet owing to the pandemic. “As such, any year over year comparison is going to be highly favourable,” Sheets added. Further, he said that April is also likely to be the last month where, according to Morgan Stanley economists, economic data is strong, but US core inflation is still below 2%.
As we enter into the summers, things might get challenging with core inflation expected to rise above 2% and stay there. “The rate of change for economic data, off of those extremes of the April 2020 lows, should also peak. While we’re keeping an open mind, these factors could make for a somewhat more challenging summer.”