It's Been One of Those Septembers

Historically, September sticks out as a noticeably poor month in the stock market. In fact, it is the only month that has yielded a negative return on average since 1926. This September is likely to reinforce that statistic. The current slide in the stock market may have more to do with unusual events than with seasonality, but then again, it may not. The credit crisis has been unfolding for over a year and it is quite possible that an already weak market was pushed into distress by seasonal weakness. In other words, it did not necessarily have to come as a surprise that stock and credit markets would be pushed to their limits in September.

As was noted after the market closed on Monday, it was the biggest one-day drop in the S&P 500 since September 17, 2001, the first market session after the horrific attacks on the U.S. That reminder prompted me to review the market action following that disaster. Then, as now, pessimism in the market was extremely high, although the particulars of the two situations are very different. In 2001 the market dropped for five straight days, resulting in a total loss of 11.6%. However, after bottoming on September 21, the S&P 500 surged over 20% in the two and a half month following.

Darkness before dawn

That is not to say I am calling a bottom or advocating optimism at this time. After all, the rally in the fourth quarter of 2001 proved to be short-lived and the S&P 500 index did not find its significantly lower, multi-year bottom until October 2002. And while September has historically been easily the worst month of the year, October has also dealt out some nasty surprises, most notably in 1929 and 1987. My point is that when pessimism is rampant, a rally – short though it may be in duration – could be around the corner.