Thursday, September 10, 2009

Should you be afraid of September and October?

Invariably, the media will begin to write stories about how September and October have been historically bad months for the stock market. Given market declines in September and October of 2008; along with the human tendency to overweight recent data; and the recent market gains: there is likely to be a lot of anxiety this year.

It is true that on AVERAGE, returns during September have been negative. October has not been a particularly good month either, on AVERAGE, but contrary to popular myth, September on AVERAGE has been worse than October.

But the term “on AVERAGE” fails to inform that returns during September and October have been positive in many years. Negative returns in some years tend to overshadow the smaller positive returns in other years.

Using data for the last 20 years, returns during 50% of the September periods have been negative. For October, the percentage is a low 30%. Using data for the last 40 years, there was a 50% chance of a decline in September and a 38% chance in October. During the period from 1897-2007, the DOW has fallen in September 59% of the time, and 41% in October. During September periods following periods of a rising market (like this year) returns have been negative 82% of the time. (With a 1.73% decline on AVERAGE.)

I think the important take away is that you should not be afraid of the calendar. Markets move because of fundamentals and sentiment. Investing is about looking forward, not backward. Markets may tend to decline in September because of fears that corporate earnings in the October “Earnings Season” may fail to meet expectations, but it is unlikely that they will fall just because markets have fallen in previous Septembers.

The good news for long term investors is that since 1960, there has been a “pattern” where markets “typically” rise in the September-December period, with a rally late in the year more than compensating for a small decline in September/October.

There are many that are waiting for a “correction” because they feel we have come too far, too fast. On the other hand, we are still 34% below the recent peak in October 2007 and markets would have to rise another 51% to reach that peak. Fundamentals and sentiment are both improving and there is still a lot of cash waiting to come into the market.

So, except for day traders trying to profit from short term market movements, prudent long term investors would probably be wise to begin putting excess cash to work according to an organized plan and entry strategy designed to allow them to reach their long term goals.

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.