“Oh it’s a long, long while… from May to December… But the days grow short, when you reach September.”
— from “September Song,” as recorded by Willie Nelson
Superstitious investors often claim that September is a month to steer clear of the stock market. Is this assumption based on financial myth or financial math?
Actually, the math is there to support the theory. Since 1926, U.S. stocks have averaged slight declines in September, the only month of the year to average negative returns over that time frame. Of course, this is an average, and September does not always represent the worst month of the year for stocks. But the numbers are there nonetheless.
Why does this happen? And more importantly, does it matter?
One theory is that many traders and investors are away on vacation in August and tend to let things ride until they return to work after the Labor Day holiday. Back from vacation with plans to sell underperforming securities, they unload them in September.
Another theory involves sunlight. Yes, you read that correctly. September is the start of autumn, and thus represents the coming of winter. There is less sunlight each day in September as the days get progressively shorter. The theory follows that traders and investors, being human, maintain a more negative outlook while staring at a cold, forbidding winter, as opposed to the rosier spirits that prevail when investors are anticipating the arrival of spring.
So does this mean we should sell our stocks just before September? After all, September has historically been a slightly negative month in stock market history. I would encourage anyone thinking along these lines to think twice. Framing returns on a monthly or even quarterly basis gets us into a "short-term" mindset, which is not usually the best foundation from which to proceed in investing.
I view the “September effect” along the lines of the “Super Bowl” anomaly. The theory goes that when the NFC (whatever that is) wins the Super Bowl, stocks will do well. Conversely, they’ll perform poorly when an AFC (see above) team wins. Supposedly it’s been accurate 80 percent of the time. Now, I watch the Super Bowl occasionally with family and friends, but our investment team has never based stock selections on performances by professional football teams. The outcome of a football game and the value of hundreds of complex companies are absolutely unrelated, regardless of how many times a Super Bowl winner supposedly confirms this connection.
Over time, I would expect the correlation between Septembers and stocks to fade. Even if 100 coin tosses turn up 90 heads, eventually time wins and outcomes revert to the mean. On the Super Bowl anomaly, I’m told that depends on Tom Brady’s retirement plans.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.