Market Insider

Why bulls rally around Tax Day

Traders work on the floor of the New York Stock Exchange.
Getty Images

If bulls are going to take back control of the stock market this earnings season, it may take until Tax Day.

Equities have been bruised in March, with major stock indexes in decline, and, if history is a guide, the beginning of April may not prove much better. Yet, April itself has been the market's best-performing month of the year, going back half a century.

The market usually lags in the first half of the month, before taking a turn higher and locking in most of its gains in the second half, according to Bespoke. The firm says over the past 10 years, the S&P 500 has seen a median gain of just 0.30 percent from the close on March 30 through April 13, scoring gains just half the time.

Since 1990, the first half of April has been flat to down, while nearly all of the month's gains have been in the second half.

Source: Bespoke

Going back 20 years, April has been positive for the S&P 500 75 percent of the time, with an average gain of 2.16 percent, according to Bespoke. It's also hands down the best-performing month of the year for the , going back 50 years.

April has a particular challenge this year. Earnings season is a bigger negative than usual hanging over the market, since analysts expect the first decline in profits in six years. The rising dollar and falling oil prices are blamed for biting into profits of multinationals and energy companies.

Earnings season begins next week with Alcoa and gets into full swing the following week—the week containing April 15—with reports from major banks and tech names.

Julian Emanuel, equity and derivatives strategist at UBS, expects a potential turn higher for stocks later in April, based on what he says are overly negative views of first-quarter corporate earnings

"Our thesis is this is a 'two steps forward, one step backward' type of market environment. You really need to see the earnings come in better than feared, and we think that happens by the end of April," he said. Net income is expected to decline 2.7 percent for S&P 500 companies, according to Thomson Reuters.

Emanuel said the two biggest factors affecting earnings—oil and currencies—were also problems for profits in the fourth quarter as well, and the reported impact was not that large.

As for the market's seasonal performance in April, the theory is simple. Investors appear to be more interested in selling positions to meet tax bills in early April, making for a choppy market until federal Tax Day on April 15.

But if April does outperform, next up is May. The adage goes: "Sell in May and go away." According to Bespoke, the Dow in the past 20 years was up half the time in May, with a low average return of 0.17 percent.