The Halloween strategy?
Known as the Halloween technique, Halloween impact, or Halloween indication, this market timing method assumes equities perform better from Oct. 31 to May 1 than from May to October. The method suggests buying equities in November, holding them through winter, selling in April, and investing in other assets from May to October. Some advocates advise against investing during the summer months. Halloween strategy is the concept of investors timing the market, which contradicts the buy-and-hold approach, which involves investing for the long run and enduring down months. Superior results challenge the efficient market theory, which assumes random stock behavior.
Understanding Halloween Strategy
The Halloween approach aligns with the standard recommendation to sell in May and travel. A form of this method has been around for a long time. Over the past two centuries, the financial media has repeated the axiom: sell in May, leave away, and return on St. Leger Day.
Many attribute the practice of selling equities in May to the United Kingdom, where the wealthy would take a break from their investments and return in September. This idea suggests that investment professionals, such as salespeople, traders, brokers, and analysts, often relocate to oases like the Hamptons in New York and Nantucket in Massachusetts during the summer.
An article by Sven Bouman and Ben Jacobsen in the American Economic Review called The Halloween Indicator examined market performance from November to April. The Halloween strategy allows investors to fully invest for six months and exit the market for the other six months, resulting in a higher annual return with less exposure than year-round stock investing.
Halloween Strategy Performance
The Halloween method has valid proof. Over the past 50 years, historical stock returns indicate that investors have seen more capital gains from November to April than in other months.
A five-year strategy of selling in May beats the market more than 80% of the time, and a 10-year approach beats more than 90%.
The graph below shows the impact of Halloween on U.S. equities between 1970 and 2017 and 1991 and 2017. It shows that the S&P 500 Index returns are greater from November to April than from May to October.
What causes the Halloween effect?
No one has determined the cause of this seasonal abnormality. Many market watchers believe that summer vacations affect market liquidity or that investors’ risk aversion contributes to seasonal returns. However, these ideas assume that increased participation leads to higher gains.
Volume and involvement are greater during market collapses and other investment disasters. Increased involvement may correlate with benefits but is unlikely to produce them. Electronic trading enables global investors to engage; thus, proximity to trading resources is not a significant factor.
Theories abound concerning the Halloween approach. For every Halloween effect opinion, there are equal amounts of supporting hypotheses. The Halloween approach is intriguing since it is an empirical and mysterious aberration.
Does Halloween spending affect the economy?
Yes. The National Retail Federation predicted $10.14 billion in Halloween spending in 2021, a trend that has continued for years. Individuals spent $102.74 on candy, decorations, costumes, pumpkins, party materials, and cards.
Is the impact of Halloween natural?
Some Halloween strategy has been around for a while. Selling in May, going away, and returning on St. Leger Day was a financial media cliché repeated over two centuries.
Is Halloween investing better than buy-and-hold?
Historical stock returns indicate that the Halloween approach was mainly successful over the past 50 years, with investors seeing more significant capital gains from November to April than in other months.
Results also reveal that selling in May beats the market more than 80% of the time over a five-year horizon and more than 90% over a 10-year horizon.
Conclusion
- The Halloween approach recommends investing in equities from November to April and May to October.
- Variations of this method and its assumptions date back over a century.
- Evidence shows this method has worked for several years, but no one has explained why.
- The Halloween signal is intriguing since it is an empirical oddity and a mystery.
