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Wake Me Up When September Ends

BLOG, MARKETS & ECONOMICS  |  6 Sep 2016

By Jon Aldrich

The band, Green Day penned the song “Wake Me Up When September Ends” a few years ago, but it often applies to investors in the stock market. Why is this? Well, September is the only month of the year where the median return has been negative going back to 1928. Every other month of the year has a positive median return going back to 1928 except for September. It appears that many years it might not be a bad idea to sleep for the month of September.

September is seasonally the weakest month of the year.

You can also use this neat little tool at http://www.moneychimp.com/features/monthly_returns.htm to select a given month and see the actual results for that month going back to 1950. For example, this screenshot below is the monthly return in September for the last several years:

Monthly Market Returns

Many assume that October is the worst month for stocks since the crashes of 1929 & 1987 and a number of other large selloffs have occurred in October, but in reality it is actually one of the better months of the year (the 5th best since 1928).

Will this year be different?

This leads us to the second part of this article and that except for the Brexit scare at the end of June, we have had a very tranquil period in the stock market since all the excitement back in January and February, remember that? However, as investors we should brace ourselves for some increased market volatility as we move into the fall season.

After all, there is growing belief that as the economy slowly continues to improve that the Federal Reserve will raise short term interest rates again. This could create some unrest in the stock and bond markets again like it did last December as investors start to adjust long term assumptions that account for higher interest rates. Plus stock valuations are not cheap. They are nowhere near the bubble that we witnessed in 2000, but they are not a screaming bargain either.

Economic news coming out of China shows its economy could be slowing again. Previous slowdowns in China have caused some headaches for world markets in the past. If things deteriorate in China or they weaken their currency again to spur growth, it could rattle markets.

The presidential election will start getting into full swing with the first debate scheduled later in the month, so the fur will be flying between the two candidates. Right now with Ms. Clinton having a fairly large lead in the polls (although that can change quickly) the market seems content, but if the Donald manages to make the race closer you could see some volatility as the market likes a sure thing, not more uncertainty as to who will be the chief executive. The market also has a pretty good idea of what Ms. Clinton’s plans are, but are not so sure with Mr. Trump.

We have also had a strong run off the lows in February, so the question may be, how much higher can the market continue to chug?  The answer may be surprising to you. Ned Davis Research, a firm that supplies market research to institutional clients, reviewed the returns of the S & P 500 following instances when the market set a new 52 week high with at least 300 days since the prior high. This is the situation we just witnessed as the S & P 500 recently set new highs. What Ned Davis found was that there has been 23 instances of this happening since 1933 and the market was higher one year later 21 of these times. Not really the results I was expecting.

So, yes September has been the lousiest month for the market in the long term, but that does not automatically mean we will have a bad September this year. As investors, we should brace ourselves for some increased market volatility over the next couple of months and this should be construed as normal market behavior. After all, nothing goes straight up and periodic corrections in the market actually make the market healthier in the long run as it helps clear out some of the excess speculation that occurs in bull markets. However, we do know that a well thought out long term asset allocation tailored to your specific situation has weathered previous market storms, and we would expect it to do so again in the future.

I don’t pretend to know what the market is going to do, and no one really does. Like, I often tell people, if I knew for sure what the market was going to do, I would have my own island somewhere warm in the South Pacific or Caribbean. I don’t have my own island, except for the rock in my pond in the backyard. Does that count?