Why is September the Cruelest Month?

by: Jim Kingsland

August may be going out with a bang, but investors are bracing for what could a bad September - knowing that it has a well-deserved reputation for being the worst month of the year.

Since 1929, stocks have declined an average 1.2% in September, compared with an average gain of 0.59% during all months of the year.

According to Sam Stovall, chief investment strategist at Standard & Poor's:

There's been a frequency of negative numbers.September is the only month in which it falls more than it rises, meaning that since 1929 the S&P has been down 53.57% of the time in September.

Why is September so bad? Part of the reason is a seasonal slowdown of money flowing into the market, so there's less new money coming in to push up prices. In additon, Stovall says some mutual funds "have October as fiscal year-end, and may be selling losing positions from mid-September until mid-October."

Tense This Year

This September is likely to be particularly tense on Wall Street. A wave of mortgage defaults has sparked a worldwide credit crunch, forcing the Federal Reserve and other central banks to inject billions of dollars into the financial system in recent weeks.

The Fed also cut the discount rate earlier in August and is under intense pressure to cut its benchmark federal funds rate when it meets Sept. 18. Stocks have been subject to steep declines on worries that the Fed may hold off on changing the fed funds rate. But there's also concern that the central bank may be forced to cut rates because the housing and credit crunch will push the economy into a recession.

According to Michael Panzner, a Wall Street trader, and author of the book Financial Armageddon,

If a rate cut happens, it will be because things deteriorate dramatically. The Fed is managing in text book fashion and doesn't want to go back to the Greenspan days of quick rate cuts and that will weigh on prespective.

There's also a worry about a slowdown in consumer spending, the main driver of the U.S. economy. Although Americans are continuing to spend, many retailers are forecasting a weak back-to-school and holiday shopping season.

Due for Down Month

Panzner also adds,

We're due for another down month - fundamentals bear that out. Earnings are always a cyclical phenomenon and that will dovetail well with what we'll see on the ground with back to school sales. The re-focus again will be on the consumer next month, which will lead to more questions about recession. We're going into September with wariness over where the next shoe is going to drop.

There is one positive note among the gloom: stocks have actually gone up the past three Septembers. Last year alone, the S&P 500 rose more than 2% during the month after the Fed stopped raising interest rates.

Stovall says more investors also have become aware that Septembers are traditionally bad and have panicked less. "A pessimist would say it's time to bail out of the market," he says. "But the person who sees the glass as half full would reason that stocks go up over the long haul."