Published in 1922, T.S. Eliot’s The Wasteland is considered one of the most important poems of the 20th century. Having become a touchstone of modern literature, the poem is best known for a few famous phrases. Among them are the opening line declaring “April is the cruelest month.”
Such a declaration may have suited Eliot’s artistic desires, but for investors April has been pleasant. From 1950 to 2009 (60 years) April is the third best month with the S&P 500 finishing higher 40 years with an average gain of 1.4%. For investors April is not the cruelest month. September is.
Over the past 60 years, September carries the worst average return (-0.8%) and the most negative months (34). More important than the number of negative finishes is that down years have often been brutal. Of the 34 years in which September registered a negative return, 15 years had losses of greater than 3% and 11 years had losses exceeding 5%.
Recent history is equally troubling. Focusing on the past 11 years of performance for the Dow Jones Industrial Average (Dow), a period which saw a stock bubble peak, a brutal bear market, a recovery to new highs, and an equally vicious decline, September has posted a negative return seven times with an average decline of 2.7%.
Some may think that this year’s strong start ensures this month will end positive. With the Dow’s first three trading days finishing higher and currently 5.3% higher as we approach the month’s midway mark, it will take a great deal of negativity to pull the market lower. History is not so kind.
Digging into the numbers produces some concerns. In 2000 and 2003, the Dow opened higher three consecutive days before weakness developed. By the end of the month, losses for 2000 and 2003 were 5% and 1.5%, respectively. As for strong gains at the midpoint, 1999, 2003, and 2004 all saw intermonth gains quickly fade and lead to negative months. Quick starts do not guarantee positive finishes.
Never one to invest based on monthly calendars and predetermined cycles, September’s history is worth remembering. It reinforces my view that risks far outweigh potential returns. Seasonal patterns may work one year and be debunked the next, but when risks are high we must remain cautious. The market remains stuck in a trading range and captive to a weak economy and uncertain political future. I will not use a calendar to dictate my investment decisions, but September’s recent, and long term, past is another indicator that extreme caution is needed.
Some may dismiss this warning. After all, bulls have done very well lately. Be careful. Interpolating short time frames into the future is a recipe for disaster. Whether the monthly cycle holds or not will be known in a few weeks. Until then, I continue to skeptically watch the market while seeking new opportunities.