Why April could be a great month for investors

As I see it, there are two reasons for investors to look forward to the beginning of April. The first shouldn’t come as a surprise.

In a few days, the new tax year will begin, giving market participants the opportunity of sheltering another £20,000 in a stocks and shares ISA. Whatever profits are made will be free of capital gains tax. Any dividends received won’t be taxed either, making it more important than ever for those planning to invest for many years/decades to keep their biggest yielding shares within the ISA wrapper.

The second reason for getting a little excited about April, however, is arguably less well known.

According to research conducted by Stephen Eckett and featured in the latest version of Harriman’s Stock Market Almanac, next month tends to be one of the best for equity investors. Indeed, it’s only beaten in terms of historical performance by December — arguably due to what has become known as the Santa rally.

Since the turn of the millennium, the market has only fallen in five years in April. If you think this is simply the result of people taking advantage of their new ISA allowance, it’s worth pointing out that this trend has been witnessed long before the introduction of these accounts. Indeed, over the last 47 years, 83% of Aprils have seen positive returns in the FTSE All-Share Index (the amalgamation of all companies in the FTSE 100, FTSE 250 and FTSE Small-cap Index). 

So how might next month play out? Eckett’s research suggests that the market rises strongly on the first trading day and then remains fairly flat through the middle of the month before climbing again in the final week. Assuming this April is similar to those that have come before, we’re likely to see healthy gains for engineers, general retailers and oil producers. The opposite is in store for those in sectors like construction, household goods and media. So next month could be good for FTSE 100 giants Royal Dutch Shell, Rolls-Royce and (whisper it) perhaps even Marks and Spencer. On the flip side, things could get choppy for firms like Balfour Beatty, ITV and Pearson.

But what happens after April?

Good question. Sadly, performance isn’t quite so stellar. Historically, there is a tendency for markets to do less well from the beginning of May to October compared to the period covering the other six months of the year, otherwise known as the ‘Sell in May Effect’. 

So, should investors sell up before deciding where to go on their holidays? That’s not recommended. 

Aside from Eckett’s data showing that the market has actually risen more often than it’s fallen over this period, we’re not big fans of jumping in and out of shares at the Fool. Not only is attempting to outmanoeuvre the market a classic investing error, anyone selling their holdings in May — in addition to incurring transaction costs — would miss out on any dividends their companies pay out over the summer. Given that these bi-annual or quarterly payouts can make a huge difference to returns over the long term, we think it’s far better to stay invested, ride out any volatility (if, indeed, there is any) and continue throwing any spare cash into your ISA and, consequently, into businesses you believe will continue to do well.