The tranquil summer we’ve enjoyed on the markets came to an abrupt end on Friday as both Toronto and New York recorded big losses.
It was a wake-up call for investors and a stark reminder that we’re now officially in the stock markets’ danger zone. It’s the time of year when fear overtakes greed and any negative event could trigger a sharp correction.
Until the Friday sell-off, stocks had been doing their best to dispel the old “sell in May and go away” theory.
At the end of May, the S&P/TSX Composite Index was hovering around the 14,000 mark. As of the close on Sept. 8, it was at 14,803, an increase of 5.7 per cent. That’s a very healthy gain in just over three months.
The story on Wall Street is similar. The S&P 500 was sitting at about 2,100 in late May; on Sept. 8 it finished at 2,181 for an advance of almost 4 per cent. The Dow Jones Industrial Average was ahead 4.5 per cent over that period while the Nasdaq Composite added about 6 per cent.
Not bad results for what was shaping up to be a difficult summer, especially after the markets sold off in June.
But good news doesn’t last forever, as Friday’s big sell-off shows.
A new study published on Sept. 4 by Yardeni Research of Glen Head, New York tells the story as it relates to the S&P 500. It analyzes the performance of the Index from 1928 to year-to-date 2016 and the results suggest investors should be cautious for a while.
September turns out to be the only month over that period when the S&P 500 was down more often than it was up. It lost ground in 48 of those years while turning a profit just 39 times. The average September loss over that time was 1.1 per cent. February and May are the only two other months with losing records and their losses are minimal, at drops of 0.1 per cent and 0.2 per cent respectively. The best month for gains is, surprisingly, right in the middle of summer. Stocks have risen an average of 1.5 per cent in July over the years.
In contrast, October, which is widely regarded as the riskiest month because some of the most infamous market collapses occurred then (including the crash of 1929) has actually been reasonably benign over the long run. Over 88 years, 52 have been positive (59 per cent) while only 36 were negative.
However, the bad Octobers can be pretty frightening, with an average annual loss of 4.7 per cent in down years, the same as September.
There are several theories as to why stocks are prone to September declines. One suggestion is that investors spend the summer swinging in their hammocks, ignoring what goes on in the world. When they return home after Labour Day they discover a lot of stocks in their portfolios that they want to dump. The sell orders hit the market within a short time period, driving down prices. Take that one with a grain of salt. Given the ubiquity of the Internet today that hardly seems plausible. You can check stock prices even from your hammock.
Well-known analyst Sam Stovall suggests the reason relates to the upcoming third-quarter reporting season. He thinks investors want to get out of marginal positions before the results come out.
Another theory puts the blame on the change in seasons. The onset of summer tends to buoy people’s moods, putting them in a more optimistic frame of mind. The shortening days of autumn dampen people’s outlook as they contemplate the coming of winter. That more pessimistic view translates into the markets, encouraging investors to sell.
Whatever the reason, the reality is that September downturns are an historic fact. That suggests that this is a good time to review your portfolio and consider selling any positions you don’t want to hold for the long term.
In some small way, that advice may contribute to another manifestation of the September effect this year. My answer is that you can’t fight history.