Still waiting for stocks to collapse, because that’s what they do in September? Then you’re probably also one of those folks who sold in May and went away.
Sorry about that!
In any event, here’s the truth about what stocks really do in September, from fund-manager John Hussman.
The fact is that yes, on average, the combined September-October period has historically produced slight declines for the S&P 500 whether you look back since 1870, 1900, 1940 or 1970. But the variance around that slightly negative return is large enough that it’s really misguided, in my view, to base predictions on it. All you can say is that maybe in a repeated game of 20 or 30 years, you might find that avoiding stocks in September and October slightly reduces risk without surrendering long-term returns.
Saying “September and October are the worst months for stocks” simply isn’t all that scary, because again, the average change in the S&P 500 is just slightly below zero, and the average total return including dividends is still slightly positive (though generally less than T-bills).
What is of somewhat greater interest, however, is the variation in September-October returns…
Jim Stack of Investech points out that if you restrict the set of Sep-Oct periods to only those that followed the end of a bear market, the returns for the S&P 500 during that subset have been positive by a couple of per cent, on average. The difficulty, from my perspective, is that the close of a bear market isn’t an observable variable, except with the benefit of hindsight. Better to use “conditioning variables” that can be measured directly.
For example, at any point in time, we can observe directly where the S&P 500 Index is in relation to its 6-month moving average. Using this variable to measure the recency of a market weakness or strength, we find that Jim is still right, but he’s right in an interesting way. Specifically, if you look at the set of periods where, at the end of August, the S&P 500 was more than 10% below its 6-month average, it turns out that the S&P 500 has indeed advanced by an average of about +2.5% during the subsequent September-October period.
On the other hand, if you look at the set of periods where the S&P 500 was more than 10% above its 6-month average (as it was at the end of August this year), we find that the September-October returns have been clearly negative, averaging a -5.6% decline for the S&P 500.
The lesson here really has nothing to do with September-October seasonality, which is interesting in the same way horoscopes are interesting, but not something I consider useful for investment management. Rather, the important point is that what investors believe are “average” tendencies for the stock market are actually very dependent on the prevailing context, be it valuation, market action, overbought/oversold conditions, sentiment, economic factors, or other factors. It is not helpful to say, look, we think this is a recovery, and in a recovery stocks do “X” – without coupling that analysis with a whole set of other conditioning variables that shape the outcome.
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