(News Bulletin 247) – Thrill-seekers do not shudder at the idea of ​​investing in the stock market on the eve of All Saints’ Day. Historical data even tends to reward this audacity… Corresponding to the famous adage “sell in May”, the “Halloween effect” in fact implies that the period from November to April offers the greatest upside potential on the financial markets.

Candy and other sweet treats, a costume and a good horror film, here are the classic paraphernalia for a good Halloween evening. For investors, it comes with a well-chosen portfolio of stocks.

The belief is that it is appropriate to abstain from the stock market from May 1st before reinvesting from the day before November 1st and therefore on Halloween. Buying shares on the eve of All Saints’ Day to sell them six months later generates an abnormally high performance, while the period from May to October most of the time results in a performance, if not negative, at least significantly lower than the return on assets without risk.

A belief that contradicts the efficiency of markets

And as we approach this penultimate month of the year, this question, which may seem trivial, naturally comes to the forefront. However, it contradicts the heart of the modern theory of financial markets: the efficiency hypothesis which would say that no martingale makes it possible to beat the indices over time, that is to say to record significantly superior performances. to the long-term average.

However, many serious studies show that a seasonal effect is indeed at work on the markets. What’s more – to the great annoyance of researchers – it is not possible to explain why it is better to refrain from trading on the stock market from May, and reinvest from the day before November 1st.

An effect visible almost everywhere, almost all the time

Two academics, specializing in seasonality issues, tested the “Halloween/Sell in May” effect on the largest sample of indices ever collected, and their conclusion is clear: invest on Halloween and take your profits in May yields 4% more than a strategy consisting of holding securities indefinitely. Professors Zhang Yi from Nottingham University Business School (China) and Ben Jacobsen from TIAS Business School (Netherlands) worked on nothing less than all available market data, a first in the world.

Their sample begins in 1693 with the London Stock Exchange and includes up to the most recent index, that of the Rwandan market inaugurated in 2013, i.e. 114 markets in total and more than 63,000 months of stock market performance to dissect… And the result is surprising in its scale since they only identified one market – the Mauritius Stock Exchange – presenting a higher return over time during the summer period. Thus, over any rolling five-year period, an investor has an 80% chance of doing better than the market average by following a Halloween buying strategy, and a 90% chance of doing better by sticking to it in ten years.

Bask in the sun rather than buy

The reason for this outperformance of the winter months around the world is therefore not really clear, even if the historical prevalence of the British market suggests a credible lead. It is also in the City’s leading daily newspaper that the earliest mention of the saying “Sell in May and go away” was found – in a 1935 edition of the Financial Timesthe article already presenting it as “an old adage”.

The most likely hypothesis would be that the wealthy classes left London for the countryside in the good times, abandoning their wallets (or at least intervening only episodically during this period). Zhang and Jacobsen’s study assumes that this effect corresponding to taking summer leave is still at work today. Especially since the seasonality of the Halloween Indicator is more marked in Europe and the United States, where the habit of taking vacations in summer is more widespread than in the rest of the world.

The desertion of investors during the summer is a factor which was also raised by John Plassard, who recalls that “the market tends to experience its weakest months during the summer due to low trading volume”.

After October, it’s time to return to the markets

An enigma remains for researchers: the Halloween effect has not been systematically taken advantage of by arbitrageurs to the point of disappearing. On the contrary, Zhang and Jacobsen observe that it tends to increase over the most recent decades.

Just like John Plassard, who supports this seasonality in the performance of stock indices by recalling the behavior of the S&P 500 over the last 30 years: “From 1990 to 2022, the return of the S&P 500 was around 2% from May to October, while that from November to April was around 7% on average. And adds that the Dow’s average gain over the past 10 years for the November-April period was 27.5%, compared to an average of 2.9% for the subsequent May-October periods.

The specialist, however, warns investors who strictly follow stock market trends, without taking into account other factors such as the economic context or the investment objectives and risk constraints specific to each profile. Just like Fidelity, which recalls that “more important factors” should influence investors’ investment decisions over the long term.