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  • Surviving the September Swoon 0 comments
    Sep 14, 2011 12:14 PM

    Guest Blog by Lauren Tivnan, Managing Editor, Portfolioist.com.

    September is here. For many of us, this means summer is over and the kids are back at school. For investors, the arrival of September signals the September swoon—a month where investors typically buckle up and hang on for a bumpy ride. 

    This year, investors have been buckled in since the start of the summer and are still bracing for impact. And who can blame them? This summer we saw the stock market free fall, had to endure the debt ceiling debate and watch helplessly as our economy teeters towards another recession.

    Compared to the past 8 months—maybe September won’t be so bad after all (one can only hope).

    Surviving the September Free Fall

     Recent research by professors at the University of Kansas Business School finds that, using data going all the way back to 1802 and many shorter sub-periods, stocks tend to under-perform in September.  The under-performance of stocks in September is surprisingly robust and has been tested in a variety of ways (see link above). 

    The Stock Trader’s Almanac also confirms that September has historically been the worst month for the Dow, S&P 500 and the NASDAQ—which, at first glance, is  surprising when you think that most of the massive downturns we’ve seen the markets have occurred in October (the crashes of 1929 and 1987 respectively). However, when you look back at the stock market slide—you can see it actually started in September— in both cases. In fact, the 1929 crash began with a 10% September slide in the Dow Jones Industrial Average.

    Historically, the September numbers are not good:

    • The Dow has lost an average of 1.3% in the month of September since 1929.
    • The Dow suffered a 10% decline in September 1929—which has gone down on record as the worst month ever—for stocks.
    • The Dow lost 684.81 points on September 17, 2001—the day the stock market re-opened after 9/11 (also the longest market closure since the Great Depression).
    • The Dow losy 777.68 points on September 29th 2008—the largest single-drop in the index’s history.

    However, last year, the numbers weren’t so bad (for September anyway):

    • The S&P 500 bucked the September swoon by gaining 8.0%. (While the gains were welcomed—no one can be sure why or how this happened.)

     Why Not Just ‘Short’ September?

    So why don’t traders liquidate their stock holdings before September rolls around–or better yet, take short positions throughout the month? 

    The authors of the University of Kansas study believe that it’s harder to profit from this type of historical trading anomaly than one would think and propose that part of the reason just might be behavioral. We all know that September signals the start of Fall and that it starts getting darker earlier. The authors propose that this daylight reduction just might be the reason for trader’s hesitance towards taking on any additional risk—or, in essence, shorting September.  There is, in fact, a separate body of research that has previously proposes such a connection that concludes:

    From a behavioral perspective, the September Swoon in stock returns is consistent with an increase in investor risk aversion tied to September’s large loss in daylight, the end of summer, and the onset of the ‘winter blues.’”

    Will September Surprise Us?

    What can we expect from September this year? From a market view point, it will be interesting to see how the month performs.

    Campaign 2012 is heating up with early debates from both sides touting their respective economic recovery plans, another round of unemployment data will be released later in the month (hopefully with better results than the total of zero jobs created in August) and last but not least, the Federal Reserve will meet on September 20-21.

    Who knows, maybe September will surprise us again this year. After all, with the markets down 4.4%  for the year-to-date, September performance just might turn out to be the highlight in a dismal year of performance.

    Related Links:

    SPONSORED BY Folio Investing The brokerage with a better way.
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