Carmel Fisher - Is September really the worst month to invest?

The tendency to look for patterns in random data is hard-wired into the human brain.  If something happens regularly we assume it is not coincidence and instead it becomes a trend or a pattern.  I’m sure that whoever decided that blondes have more fun developed this concept after meeting several fun-loving blondes – if only they spent more time with brunettes, the folklore could have been quite different.

So it is for September.  After a few bad ones, September is now considered the worst month to invest, and expected to almost certainly end in negative territory.  September’s reputation stems from the fact that it has the worst historical monthly average return, with falls more common than rises since 1926.  

There have been a number of creative explanations as to why Septembers are so bad, with many blaming the fact that investors return from their Northern Hemisphere summer holidays and sell their shares, particularly if the headlines have been negative while they’ve been on vacation.  Others say that investors think the month will always be bad, so they always sell in anticipation and therefore stocks always fall.  This of course is nonsense.

One of the reasons for September’s bad track record is that there were a few particularly bad Septembers that skewed the average.  Two were during the Great Depression: 1930 (-13%) and 1931 (-30%) and two others occurred in the middle of big bear markets: 1937 (-14%) and 1974 (-12%).  None of these were isolated incidents that just happened because the calendar page turned, rather they occurred in the midst of much deeper negative fundamentals at the time.  

But, you can be sure, investors will be feeling anxious heading into this month and this anxiety might even make negative September a self-fulfilling prophesy.

This year there is added fuel for a negative September, or at least, enough things that could go wrong to justify a poor month on markets.  As if the will-they, won’t-they speculation around the Federal Reserve’s quantitative easing tapering wasn’t enough, there is also a potential US strike on Syria, a German election, Japanese tax changes, and countless economic data releases that could be potential catalysts for pain.  

Markets were anxious last month with the S&P500 falling 3% August on pre-tapering jitters, so perhaps the September effect has already been felt in part.

Closer to home we have a potential market catalyst in the Australian election, though arguably whatever the result, market reaction should be positive because companies will have certainty and can resume their business planning and strategies knowing what the political regime will be for the next three years.     

As a market myth, the Bad September rule is one of the more dangerous because of course, no month or season or particular period is inherently good or bad for stocks.  The opportunity cost of sitting out of markets during September could indeed weigh heavily on your investment returns.  That’s not to say September will be a sure-fire positive month, but whatever happens, it will be coincidental rather than instructive.  

Long-term investors should look beyond such hype and focus instead on long-term fundamentals.