September Swoon or Not?

There are several stock market anomalies out there like the January effect, the Monday effect, and other less well known effects such as the Value Line effect.  Most tend to work in theory but when trading costs and other factors are weighed in, they are not necessarily viable trading tools.  Another so-called anomaly is the September effect.  Based on historical market returns and more recent events such as 9/11 and the collapse of Lehman Brothers in 2008 many investors now look to shelter their portfolios as the calendar turns to September.  It used to be that October that was the big concern due to the market crashes in 1929 and 1987 but that has changed in recent years.

Looking at recent events one could be concerned about investment prospects for September.  Lehman Brothers and 9/11 are just two specific events but they are based on different circumstances.  Obviously 9/11 was based on a terrorist attack and of course the markets would react negatively to such happenings.  The interesting thing that year is how fast the markets came back but nevertheless that September the market was underwater.  September 2008 certainly was no better as the economy continued its downward spiral and news came that Lehman Brothers and AIG and others were facing severe liquidity issues.  The U.S. government ultimately chose not to “save” Lehman Brothers and Lehman did fail sending the markets downward.  Recently, I heard James Stewart of the Wall Street Journal speak about the economy and markets during those turbulent days and it was interesting to hear how bad things really were.

History also shows the cumulative effect of past Septembers on the September effect.  September, 1931 saw the Dow Jones Industrial Average (DJIA) fall 14.8%, September, 1937 the DJIA fell 12.9%, September, 1974 the DJIA was down 10.4%, and finally September, 2002 the market gave up 12.4%.  Obviously the month has issues!  A recent article on quoted from the book “Stocks for the Long Run” by Jeremy Siegel that from 1885 to 2006 the month of September averaged a negative 1% and from 1990 to 2006 the return got worse going to a negative 1.5% over that time span.  Interestingly, if you had invested $1.00 in 1885 and only received the DJIA returns for the month of September from 1885 to 2006 you would have ended up with only $0.23 whereas if you received the full DJIA returns during those years you would have ended up with $490.00.  However, if you received the DJIA returns minus September you would have ended up with $2,176.00 – indeed the month does have an effect!  It is also worth noting that this isn’t just a domestic effect but the data shows that it holds true internationally as well.

What are some possible factors that may be causing this effect?  History itself is one, but so are early third quarter profit forecasts (warnings), seasonal selling, and traders returning to work full-time after taking summer vacations and needing to revamp their portfolios.  Whether any of these are indeed true causes no one really knows but they do add fuel to the discussion fire.

This year the markets are bucking the trend – at least through today.  The DJIA has gone from 10,269 on September 1st to 10,595 today, certainly not a pullback.  It will be fun to watch and see if the markets can maintain their momentum and finish on a positive note for September (for a change). 

Is this a positive sign of things to come?  Do you trade on so-called anomalies?  Does September scare you?  We look forward to your replies.


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