Why April Showers Profits on Investors

For investors wondering whether or not the current market rally has legs, the answer is "yes" -- at least for the month of April.

Over the last five-year and 10-year periods, the S&P 500 index has historically averaged its highest market returns in April, according to Schaeffer's Investment Research. In fact, data unearthed by Schaeffer's senior quantitative analyst Rocky White shows that April has produced the highest average monthly returns for the benchmark index over the last 30 years as well.

Over the past five years, the S&P 500 has produced average returns of 3.54% in April, followed by 3.19% in March and 1.91% in May. Over the last 10 years, April enjoyed average returns of 2.26%, followed by 1.32% in May and 1.05% in March. The average return for April over a 30-year period was 1.76%.

October was the worst month for returns over the last five-year period, with the S&P 500 registering an average loss of 3.21%. Over the last 10-years, February and September virtually tied for the worst month for returns, with February logging an average 2.37% loss and September losing 2.36%.

April's IRA Contribution Deadline

Schaeffer's senior equity analyst Richard Sparks says that one common theory as to why April does well for investors is that it happens to be the month by which IRA contributions must be made for tax purposes.

"You may find that people who are waiting to fund their IRA contributions are putting that money in nearer to the deadline," says Sparks. "That can create money flow into the stock market as that money is invested into mutual funds." Additional money pumped into the market can cause stock prices to rise as equity mutual funds are generally the largest recipient of investment money for retirement accounts.

Sparks also notes that the 2009 market rally took off in April, leading to a very high gain of 9.98% during the month. In fact, the market has hit lows each of the last three years, only to bounce back strong in April. The last time April registered a loss was in 2005 when it was down 2.01%.

Boon For Financials, Transportation Stocks

Historically, the financial services and transportation sectors have performed best during April. Schaeffer's reports that financial stocks outperformed all other sectors, producing average April returns of 4.74% over the last ten years. Transportation stocks were next, with average April returns of 4.29%.

Sparks said that although those two sectors have performed well over the five- and 10-year periods, going forward in 2010, Schaeffer's really likes commercial real estate, financials and consumer discretionary with a focus on restaurants. All three areas have been beaten down and hold promise for significant gains for investors, he says.

As far as areas to avoid, Schaeffer's research showed that airlines and bonds have historically performed the worst during the month of April over a 10-year period. Airline stocks posted an average monthly loss of 0.18% and bonds had the worst monthly returns of all -- averaging a loss of 2.17%.

'Rising Tide That's Lifting All Boats'

When asked which areas investors should avoid in 2010, Sparks answered cautiously. "In this particular market you've got the rising tide that's lifting all boats," he said.

Sparks said that although he expected consumer staples and large chip stocks to show gains this year, those two sectors would probably underperform the three sectors Schaeffer's believes has the most promise -- commercial real estate, financials and consumer discretionary. But overall, investing in April should shower investors with profits.