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April showers bring... a strong stock market.
The S&P 500 has closed positive in April in 15 of the last 16 years, according to LPL Financial, and April is routinely celebrated as one of the best months of the year for stocks.
“The good news is stocks really appear to love April," Ryan Detrick, chief market strategist at LPL Financial said in a recent research blog post. "Not only is it the best month on average since 1950, but it has also been higher an incredible 15 of the past 16 years as well."
Of course, no one can predict where the market is heading in any given month. The stock market had a rough start to the year as investors worried about rising inflation, continued supply chain issues, the war in Ukraine and the likelihood of the Federal Reserve raising interest rates. Stocks saw a slight comeback in March, but the S&P 500 still posted its worst quarter since March of 2020, when the pandemic began.
Yet when taking the long view, April has been the best month for average S&P 500 returns in the past 20 years and the second best month in the past decade, according to LPL Financial. (One caveat: In a midterm year, the month ranks only seventh best and is barely positive.)
When viewed over the course of the past century, April has been one of the best (if not the absolute best) months in terms of stocks' performance. The average monthly gain of the Dow Jones Industrial Average in April over the last 100 years is 1.46%, with positive returns 62% of the time, Bespoke Investment Group wrote in a note to clients Friday morning. That ranks as the third-best month behind July and December. In the last 50 years, Bespoke says that the 2.21% average gain in April is easily the highest of any month.
"Not only that, but with just three down Aprils over the last 20 years, no other month during this period has been more consistent to the upside," Bespoke Investment Group added.
Why is April so strong for the stock market?
As for why stocks tend to perform so well in April, that's an "age-old debate," says Jim Paulsen, chief investment strategist of The Leuthold Group.
Another potential reason is that institutional investors may be cleaning up their portfolios in March by removing some underperforming stocks, since they need to report quarterly to shareholders and the first quarter ends at the end of March, says Sam Stovall, chief investment strategist at CFRA Research. Then in April, those investors may have some cash on the sidelines and buy back in, he adds.
Overall, we can't be certain why these seasonal trends happen. But November through April does tend to be the strongest part of the year for stocks, experts say.
Can we expect a good month for stocks this April?
There are indications that stocks could fare well in April 2022. On top of April generally being a good month for the market, history says that following a down first quarter, investors may feel as though they’ve oversold and want to buy back in during the second quarter, Stovall says.
Keep in mind that while history is a good reference point, it is certainly not a crystal ball that can predict the stock market's performance.
Still, Stovall says there are reasons that stocks could pop higher this April. Most of the factors investors have been worried about — like inflation, interest rates and geopolitical tensions — have been concerns for weeks, which means there is nothing new at the moment to spook investors, he says.
There's hardly any consensus on where stocks are heading, however. The Fed is tightening monetary policy and a key part of the yield curve inverted this week, which is often seen as a sign that a recession is coming. Meanwhile, there is still a war in Ukraine and elevated commodity prices. That could throw the positive April effect to the sidelines, Paulsen says.
At the same time, the economy appears to be strong, and, investors may be trying to get back into the market after the recent correction.
"It feels a lot better going into April than it did coming into March," Paulsen says.