If you must buy stocks, do so this month. Or at least, this is what a survey of stock market history by the month suggests.
Investors have a very high probability (8 out of 10) of making profits on stocks bought at the beginning of December.
This is one of the takeaways from our study on monthly returns on the Sensex since 1979, the year the index was flagged off.
Globally, there are many myths surrounding seasonal trends in stock markets — how the summer months tend to make equity markets languish, how October always brings a market crash, and how Santa Claus inevitably ushers in a year-end rally in December. These are based on empirical studies in the US stock market.
We decided to check out the numbers for the Indian markets and found the following.
POCKETING GAINS The Sensex has recorded positive closes in 28 of the 35 years tracked, suggesting a high probability of pocketing gains from stock market investments this month.
The average return an investor made during the month since 1979 was 3.4 per cent. The highest gain was clocked in December 2003, when the Sensex soared 15 per cent.
While it is nice to imagine that Santa and his reindeer are conjuring up year-end cheer, the real reason is a little more pragmatic.
As December ends, investment managers like to do some window-dressing to make their annual returns look good — for better bonuses.
The other reason could be investors and traders closing their trading positions early in the month to enjoy the holiday season with their families.
Many old-timers would remember that prior to the 1990s, the Indian equity market was actually closed between Christmas and New Year.
And if you are in India, you mustn’t ‘sell in May and go away’. For, after December, June is the month that is most likely to deliver positive returns, with gains in 24 out of 35 years. September comes next, with positive returns in 22 out of 34 years.
October has been living up to its bad reputation in the Indian market, with the Sensex recording negative closes this month in 21 years. The global stock market crashes of 1929, 1987 and 2008 occurred in October.
Indian investors, however, need to place March right beside October as the month most likely to yield losses. Investing in March has led to losses for investors 21 out of 35 times.
March usually sees a frenetic pre-Budget rally that fizzles out promptly after the Budget is presented.
Volatile months Surprisingly, the months that earn you the best and the worst returns are also the ones that can subject you to stomach-churning volatility. Over the last 35 years, the monthly change in the Sensex both in December and October has been greater than 5 per cent.
For instance, December recorded changes of more than 5 per cent in 17 years, a probability of one in two.
But while nobody is likely to mind a volatile month that ends well, March and October invariably serve up wild swings in the market with a negative close.
March has recorded changes of over 5 per cent in the Sensex in 19 out of 34 years. On average, markets fell about 1 per cent in March. October is the only other month in which the average monthly return is negative, at -1.1 per cent.