April has been the best month of all year for US stocks, consistently over the past 30 years. On the flip side, the months of May through September generally saw below and below average returns, said Andrew Sheets, chief cross-asset strategist at Morgan Stanley. Even in 2020, just after the sharp sell-off seen in March, stock markets exploded in April. The NASDAQ rose 14%, the S&P 500 jumped 12%, and the Dow Jones climbed 13% over the same period. Sheets added that April tends to outperform other months, but will 2021 be the same?
April marks the start of the new fiscal year for certain geographies and also kicks off the earnings season for the January through March quarter. However, the most compelling reason for April’s performance, according to Sheets, is that a good chunk of the money is coming back to investors in the form of coupons, dividends and tax cuts at this time of year. . Likewise, the ensuing underperformance in the coming months is helped by the drying up of cash flows, excluding coupons and dividends.
“Summer also faces a very human problem: investors tend to take vacations. Some investors are probably selling a little so they have less to worry about, and with more people out of the office, market liquidity tends to be a bit worse, ”the market strategist said. While these two reasons don’t seem like major issues, they actually do impact returns. Even global markets perform better during the month of April. Yields in April tend to be around 2% above average, while yields from May to September are around 1% lower. “Yet every little bit counts, and over time those little numbers can make a difference,” Sheets said.
Will the year 2021 be the same?
But, will 2021 follow the same path? While the month-to-month evolution of the market cannot be easily identified, Andrew Sheets believes some things have lined up correctly for April.
This earnings season could be strong on the back of a weak base from the previous year when we saw economic activity plummet due to the pandemic. “As such, any year-over-year comparison will be very favorable,” Sheets added. In addition, he said that April is also likely to be the last month that economists at Morgan Stanley say economic data is strong, but core inflation in the United States is still below 2%. .
As we move into the summers things could get tough with core inflation expected to exceed 2% and stay there. “The rate of change in economic data, outside of these extremes of the April 2020 lows, is also expected to peak. Even if we keep an open mind, these factors could make the summer a little more difficult. “