Investors, take note: The stock market could have a nice short-term rally.
Data from Bespoke Investment Group shows that Tax Day historically tends to precede a week of good performance for stocks.
What the data says
New Tailored investment research suggests a tendency for stocks to perform weaker during the first few weeks of the second quarter, at the end of the tax season.
The weakness of the market performance depends on the performance of the first quarter; if the S&P 500 index fell in the second quarter, in the first two weeks of April there was an average rally of just 1.4%. If the S&P 500 is on at the end of the first quarter (like this year), early April yields tend to be a much more modest 0.2%.
“Whether tax-related or not, there is some historical precedent for April to start off poorly, especially in years where the first quarter was positive,” the company wrote in its note Monday morning.
Don’t worry, though. Another company report shows that days following the mid-April tax filing deadline is a different story.
There are a couple of reasons why this trend might occur. The first is that investors who received a tax refund could put that money back into the market. Another theory is that earnings season starts around the same time.
Here’s what the data, provided by Bespoke Investment Group, shows about post-Tax Day market performance between 1998 and 2022:
- In 19 out of 25 years, the S&P 500 has traded in the green in the week following the tax deadline.
- During this time frame, the index recorded an average gain of 0.83%. This is almost three times greater than the average gain of 0.31% recorded in a week throughout the year.
Keep in mind
Overall, the report is a positive sign for investors. However, it’s worth noting that the stock market has seen declines over the past two years following Tax Day. In 2022, the S&P lost more than 2% during this period, making it the second-worst post-tax week in the data set of 25 years (the worst year was 2018, with a loss of almost 3%). In 2023, the S&P lost about 0.1% in the post-tax week.
Shortly before the sharp decline two years ago, the Federal Reserve had just implemented its first interest rate hike since 2018. Rate hikes, used by the Fed to contain inflation, tend to make investors think harder. caution about their finances. Those same rate hikes – if history is any indication – could potentially trigger a recession, giving investors plenty to worry about. To date, the Fed has not lowered interest rates, likely partly explaining last year’s slight decline.
All in all, next week could be a turning point: History suggests gains, but the issues that helped reverse the trend over the past two years still cause investor anxiety today. The March inflation report threatens to keep this trend going as well; with higher-than-expected inflation, the Fed is making a mistake in keeping rates higher for a longer period and risking a hard landing for the economy.
Of course, the old adage goes that past performance is not indicative of future earnings, and investors can find virtue in thinking about the long-term prospects for stocks, rather than trying to predict short-term movements.
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