Proving Grounds: Solid Best Six Month Performance Does Little to Improve Worst Months
By: Christopher Mistal
March 14, 2017
From the Stock Trader’s Almanac, it is known that the “Best Six Months” (BSM) for DJIA and S&P 500 are November through April. These are the months where DJIA and S&P 500 log the majority of their gains, time and time again. Since October 1949, DJIA has racked up a BSM gain 53 times in 67 years with an average advance of 7.5%. S&P 500 has nearly an identical record with one fewer win a modestly lower average gain of 7.1%. 53 gains in 67 periods works out to a 79.1% success rate, a solid DJIA result.
DJIA and S&P 500 are shaping up to be well above average this time around. As of yesterday’s close, DJIA was up 15.1% and S&P 500 was up 11.6% for the current BSM. Most of this strength has been attributed to the prospects of tax cuts, healthcare reform, reduced regulation, infrastructure and defense spending the Trump Administration campaigned on. A rebound in fourth quarter corporate earnings also played a part in the rally, that part has likely been understated. 
Somewhat naturally, the recent surge in stock markets to new all-time highs has many on edge as valuations appear stretched. In an effort to better gauge the prospects of the rally continuing through the “Worst Six Months” (WSM), May through October, after such an above average performance thus far, we examined two different scenarios for both DJIA and S&P 500. 
Although the WSM period is rightfully named, it is not always negative. Instead, there are generally less frequent gains and of lower magnitude. Looking back over the past 67 years, DJIA has advanced 40 times in the WSM and S&P 500 has 42 advances. However, average gains are significantly lower at 0.4% and 1.4% respectively.
[DJIA Above Average Best Months Table]
[S&P 500 Above Average Best Months Table]
In the above two tables, all above average BSM periods for DJIA and S&P 500 appear with the subsequent WSM lined up in the right side of the table. Any BSW that was greater than 7.5% for DJIA and 7.1% for S&P 500 are included. This resulted in 33 occurrences for each. For DJIA, the subsequent WSM period in this scenario differed little when compared to all 67 years. Its average gain at 0.42% is unchanged and the frequency of losses was also little changed (42.4% compared to 40.3% in all 67 years). S&P 500 however, did see a modest improvement during the WSM. Its average climbed to 3.30% and frequency of declines fell from 37.3% to 27.3%. Overall, an above average BSM period did not have a meaningful impact on WSM performance.
[DJIA Best Months Exceeding 15% Table]
[S&P 500 Best Months Exceeding 11% Table]
In these two tables only past up BSM periods that exceeded DJIA’s and S&P 500’s current BSM gains were examined. In this scenario the subsequent WSM period was also essentially unchanged. The frequency of losses for DJIA was virtually unchanged while average performance crept up to 0.92%. However, S&P 500 frequency of losses increased to 36.0% and its average gain retreated to 2.28%. 
Overall, the results of these comparisons show that above average BSM gains or even well-above average BSM gains historically have not lead to a similar boost in performance during the WSM in any way that could be considered consistent and reliable. The upcoming WSM period is likely not to differ much from the past with meager if any gain and a heightened possibility of a pullback or correction.