The Golden Season for Stocks: How to Capitalize on the Halloween Effect, Santa Rally, and January Effect

Happy Halloween! As we celebrate this spooky season, let’s also look ahead to the November–January stretch, historically known for delivering the best 3-month stock market returns. Let’s dive in!

U.S. Stock Market: Monthly Investment Returns

There’s an old stock market saying: “Sell in May and go away.” But if you sell, eventually you need to buy back, right? The best timing for that buyback is the end of October. Let’s take a closer look to see if this really holds true.

Source: https://capital.com

The table above averages data from nearly 50 years, spanning from 1972 to 2022. Although there are slight variations among the three major U.S. stock indices — S&P 500, Nasdaq, and DJIA —November and April consistently stand out as the months with the highest returns. Instead of looking at single-month returns, how about checking the returns when investing for three consecutive months? I went ahead and calculated it myself.

Consecutive 3-Month Investment Returns

Source: Calculations by Neo

For example, let’s look at the S&P 500 (3M) in the fourth row for November. This is the average return when investing in the S&P 500 for three months, starting from the closing price on the last day of October. The November to January investment return calculation is as follows: (1+1.4%) × (1+1.3%) × (1+1.0%) - 1 = 3.7%. Among the three major U.S. indices, investing at the end of October yields the highest returns. Starting at the beginning of October is also fine — it ranks as the second-best period.

The classic "Sell in May and go away" strategy means selling in early May and buying back in early November, holding stocks from November to April. For a six-month period, this timeframe has historically shown the best returns. However, since February tends to underperform on average, narrowing it down to a three-month period reveals that November through January consistently delivers the highest returns.

Efficient Market Hypothesis vs. Monthly Seasonality

Is there really a monthly effect? According to the Efficient Market Hypothesis, such monthly seasonality should have disappeared long ago. Numerous studies have explored this topic, with one of the most authoritative recent studies published in the Journal of International Money and Finance in 2021. This study analyzed 114 stock markets worldwide over a 320-year span. 

While only the introduction of the paper is freely available, I’ve summarized its key findings based on the introduction and various news articles referencing it. Here’s the link to Jacobsen and Zhang’s study.

• Many investors dismissed the "Sell in May and go away" strategy. However, data reveals that this strategy has been effective and quite reliable.
• This strategy worked well globally, particularly in North America, Europe, and Asia.
• The only exception was Mauritius, where returns were higher from May to October.
• On average, stock markets gained a total of 5.1% during the six months from November to April, compared to only a 1.1% gain from May to October - a difference of 4% on average.
• Interestingly, over the past 50 years, the effectiveness of this strategy has actually strengthened.

Why Stocks Thrive from November to January?

So, what drives the stock market's strong performance from November to January? As legendary investor Andre Kostolany famously said, "The stock market is a psychological game in the short to medium term."

During this period, Americans (and broadly, Westerners and people around the world) gather for major family-centered holidays. Halloween on October 31st, Thanksgiving on the fourth Thursday of November (November 28th in 2024), Christmas in late December, and New Year’s on January 1st — all of these events happen in close succession. Does it sound overly simplistic to say that people’s good mood during the holiday season has a positive impact on stock markets?

Below is a summary of various insights plus my thoughts on why the Halloween Effect, Santa Rally, and January Effect occur.

Halloween Effect

Definition: Narrowly, the Halloween Effect refers to stock market gains between late October (around Halloween) and early November. Broadly, it refers to stock gains in November.

Investor Sentiment: During the festive Halloween season, people’s mood tends to be positive.

Increased Spending: Halloween is a significant industry. According to finveo.com, Halloween-related spending in the U.S. alone was expected to reach $12.2 billion in 2023. Each year, Americans spend increasing amounts on Halloween costumes, candies and treats, decorations and party supplies, haunted house entertainment, and even costumes for pets.

Santa Rally

Definition: Narrowly, a Santa Rally refers to stock price increases between Christmas and the New Year. Broadly, it can refer to stock gains from November through January.

Investor Sentiment: This is the time of year when people are generally in the best mood (from the start of December, when Christmas carols start playing, through the beginning of the New Year).

Institutional Investors: In November and December, institutional investors tend to buy stocks actively to improve their year-end performance.

Year-End Dividends: Many U.S. companies pay dividends in late December or January, and this money often flows back into the stock market.

January Effect

Definition: The January Effect refers to the tendency for stock prices, especially small- and mid-cap stocks, to rise in January.

Investor Sentiment: At the beginning of the year, investors often have an optimistic outlook.

Institutional Investors: This is a period when institutional investors adjust portfolios to generate new returns for the year.

Stock Buybacks: Investors sometimes sell losing stocks in December to receive tax benefits and then repurchase them in January.

Year-End Bonus: Employees often invest a portion of their year-end bonuses in stocks in January.

In addition, the self-fulfilling prophecy effect can play a role. Since returns from November to January have consistently been strong, investors now actively buy during this period in anticipation, which can contribute to actual stock price increases along with other factors.

Closing Remarks

I want to explain why, as a long-term value investor, I explore topics like monthly effects that only traders often consider.

First, even as a value investor, overlooking a long-standing, statistically significant market bias like this would be a missed opportunity. In the short to medium term, stock markets are often influenced more by collective investor psychology than by fundamentals, even though fundamentals ultimately prevail.

Second, even if you don't incorporate the monthly effect into your investing strategy, being aware of these trends can help you manage your emotions. High returns from November to January don’t necessarily indicate that you're an investment genius or that the market has entered a bull phase. Similarly, lower returns from May to September don’t necessarily reflect your investment mistakes or signal a bearish market. By understanding these general market tendencies, you can manage your emotions more effectively.

Third, while I primarily use a long-term value investing approach like Warren Buffett, I don’t disregard other proven investment strategies. In particular, I acknowledge the merits of quantitative investment methodologies.

As you know, next week's U.S. presidential election may lead to increased market volatility. Both the U.S. economy and stock market also have some elements that could present future hurdles.

However, as always, I wish you to continue growing rich slowly and surely!

This blog does not offer investment, financial, or advisory services. The information provided herein is for general informational purposes only and should not be interpreted as advice for making specific investment decisions. All investments involve risk, and past performance is not indicative of future results. It is advisable to consult with a qualified financial advisor to determine strategies or products that are appropriate for your individual circumstances. The owner, writer, or operator of this blog accepts no responsibility for any direct or indirect losses that may arise from the use of or reliance on the content presented. The information provided on this blog is subject to change and may not be current. The content is based on personal opinions, as well as information from news sources and research, and may vary due to shifts in personal opinions, financial market conditions, or other influencing factors. Most data referenced is derived from daily closing prices. Data finding, sorting, graphing, and analysis are performed primarily by myself, and while efforts are made to ensure accuracy, errors may be present. If you identify any inaccuracies, please inform me via comments or email, and I will endeavor to review and correct them as necessary. External content or images will be cited to the best of my ability.