CHAPEL HILL, N.C. (MarketWatch) — September is an awful month for the U.S. stock market, regardless of how you slice and dice the data.
Since the Dow Jones Industrial Average was created in the late 1890s, September has produced an average loss of 1.1%. The 11 other months of the calendar, in contrast, have produced an average gain of 0.8%.
Furthermore, September’s awful record can’t be traced to just one or two terrible years. On the contrary, the month has an impressively consistent record at or near the bottom of the rankings.
“If a convincing explanation for the September effect were ever found … the historical pattern would quickly disappear.”
Larry Tint, chairman of Quantal International
In fact, as you can see from the accompanying chart, September was a below-average performer in all but one of the dozen decades since the late 1800s. And in more than half of those decades, it was in 11th or 12th place in a ranking of monthly average performance.
Does this terrible track record mean you should “sell in September or get dismembered,” to quote a clever phrase that hedge fund manager Doug Kass recently used in an email to followers?
I’m not so sure.
Awful as September’s record is, bad stats are not, in and of themselves, sufficient reason to make portfolio changes. Correlation is not causation, after all. And, try as I might, I have yet to come across a plausible explanation for September’s record.
And I have tried. Every year around this time, I have asked you to submit your hypotheses for why September should be so awful, and none that has been submitted up until now has been able to withstand statistical scrutiny.
(These are the most popular hypotheses: 1. Investors are more prone to sell stocks when they return from summer vacation; 2. Many mutual funds have fiscal years that end Sept. 30, leading them to engage in “window-dressing” during the month; and 3. Investors are forced to sell equities in September to pay the sky-high tuition bills they’ve just received from their kids’ private schools and colleges.)
Some of you will take this discussion as a challenge to find the “real” explanation for September’s dismal record, but Lawrence Tint advises you not to waste your time. Tint is the former U.S. CEO of Barclays Global Investors and currently chairman of Quantal International, a risk-management firm.
In an interview, Tint told me: “If a convincing explanation for the September effect were ever found, savvy investors would immediately begin jumping the gun by selling in August, others in turn would try to beat them, and the historical pattern would quickly disappear. Unless you or I are able to discover something nobody else knows about, by the time we know why a pattern exists, it’s too late to profit from it.”
In other words, two preconditions must hold in order for it to make sense to bet that September will continue to be awful for stocks. First, the month’s dismal record has to be more than a mere statistical fluke of the historical data. Second, the reason for its terrible performance must remain a mystery.
Good luck with that.
To be sure, there may be other good reasons to avoid the stock market in coming weeks. In fact, I’ve suggested a couple in recent columns — everything from excessive bullish exuberance among market timers to an extremely overvalued stock market.
But note carefully that if you choose to act on those other reasons and build up a cash position in coming sessions, you will be doing so for reasons having nothing to do with the calendar soon to read “September.”
The reason historically was harvest time. Many commodities were sold at this time, thus depressing prices. This would have occurred for a long time. Today, it’s not an issue, but somehow the pattern remained and September is just a bad month for stocks. This can often carryover into October.