April is a glorious month in many ways…
Here in the Baltimore-Washington D.C. area, spring really comes alive in the fourth month of the year. The cherry blossoms peak and the dogwoods in my neighborhood bloom in various shades of white, pink, and red.
Best of all, the tree swallows return to this area from Florida and the Caribbean – a sure-sign that spring has finally arrived.
For investors, April also tends to be a wonderful month.
From 1950 to 2024, April delivered the top cumulative return in the Dow Jones Industrial Average (138%), and the second-best return in the S&P 500 ( 110%). Most other months have brought returns that are well under 100% over those 74 years.
The so-called “April effect” may seem like a random result – some month must be first, after all – yet recent research suggests there’s a reason that stocks consistently perform so well during April.
It’s due to Tax Day – which of course typically falls on April 15, or occasionally a day or two later.
Take a look at the data…
Market watchers always speculated that the tax filing deadline had something to do with the better stock market gains of April. Though an economic paper published last year by the University of Hawaii firmly concluded that the deadline produces large flows of funds into retirement accounts in during the month.
Last Minute Filers
Individuals can file their annual tax returns at any time over the three and a half months from January 1 until the tax deadline. But as you might expect, a large portion of filers wait until the last two weeks to file. That generates several effects that boost the stock market.
First, because April 15 is also the deadline for contributing to tax-advantaged retirement plans for the prior year, flows into those accounts rise in mid-April. There are annual limits to how much an individual can contribute to a retirement account – for 2024 it was $7,000 to an IRA and $23,000 for a 401(k) – so many people seek to hit that limit by the April deadline to maximize their tax deduction.
And second, many individuals overpay their taxes throughout the year and then receive their refund in April. They often invest some of those funds into their tax-advantaged retirement accounts or other investor accounts.
In fact, the elevated market returns are even narrower than in the month of April. They occur during sixteen days that surround the tax deadline.
The paper looked at five U.S. and four international stock indexes during a window that spans the 10 days prior to the April tax deadline, the deadline day itself, and the five days following the deadline. It found that the average daily return during those 16 days reaches levels that are eight times the average daily return during the rest of the year. International stock indexes rise during this window, too, as typical retirement funds hold both domestic and international stocks.
The paper also speculates a knock-on effect: some investors are aware of the April effect and put extra funds to work during the month to take advantage of it, which drives stock indexes even higher.
Terrible Tariffs
This year may be different, however, as President Trump’s next round of tariffs, scheduled to be revealed next week on April 2, could upset investors and offset the April Effect.
Right now, it remains extremely difficult to predict what those tariffs will entail or their impact on the economy or markets. But as of this writing the belief among investors seems to be that the tariffs may be more targeted and smaller than previously expected.
That’s boosting the market, with the S&P 500 up almost 2% this week so far on that optimistic sentiment.
Let’s hope the market is right and we can all enjoy the April effect this year.
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