Black September for Stock Market ?
For Stocks, September May Be the Cruelest Month
September is fewer than three weeks away. Feeling nervous? Maybe you
should be. For investors, the period between Labor Day and Halloween
is proving an annual fright show. And no one knows why.
It was, of course, in September last year that Lehman collapsed and
everything fell apart. But then it was also September-October 2002
that the last bear market plunged to its lows.
The 1998 financial crisis? It began late August, and rolled on for two months.
The famous crash of 1987 came in October. But most people have
forgotten that the market actually started sliding downhill in late
That’s almost exactly what happened in 1929 too. The big crash came in
October, but the market peaked just after Labor Day. Prices began
falling through September, then tumbled further still.
The worst month of the Depression? September, 1931, when the Dow fell
about 30 percent.
It was also in September, 2000, that the bear market really got going.
The 9/11 crisis, of course, came in September. That was hardly caused
by investors. But what is forgotten is that the stock market was
already looking wobbly. In the two weeks before the terrorist attacks,
the Standard & Poor’s 500-stock index fell 7 percent.
The great panic of 1907? October. The great crash of 1873? September.
So is there really a September, or a Halloween, effect?
Since 1926, investors have lost nearly one percent on average during
September, according to market data tracked by finance professor
Kenneth French at Dartmouth’s Tuck School of Business. It’s the only
month with a negative average return.. For each of the other 11
months, investors gained nearly one percent on average.
Other research takes the idea of an autumn dip even further. Georgia
Tech doctoral student Hyung-Suk Choi studied the so-called “September
effect” as part of his recent Ph.D. thesis. He looked at data for 18
developed stock markets around the world spanning up to 200 years, and
found that in 15 of those markets, September brought red ink for
Fund manager Sven Bouman and finance professor Ben Jacobsen concluded
that investors in most world markets have historically fared poorly
from May through October each year. They made their money between
November and April.
Hence the old British investors’ saying, “sell in May and go away,
don’t come back till St Leger Day.” (But since St. Leger Day is in the
middle of September, even that date may be premature.)
Some of the September or Halloween effect is caused by a few really
bad years. But that’s not the whole story. To reduce the influence of
outliers I looked instead at the median result since 1926 instead of
the statistical mean. The performance gap between September and the
other months shrank from 2 percent to 1.4 percent. That’s smaller, but
it’s still a difference. The median September saw losses of just 0.07
percent. But the median month for the rest of the year gained 1.37
As for the causes of a possible September effect, most are stumped.
“There haven’t been any good academic stories to explain it,” admits
Michael Cooper, finance professor at the University of Utah’s David
Eccles School of Business. “One credible explanation is just luck.”
It’s been suggested that mutual funds drive down the market by selling
their losing stocks before their October 31 year end. Or that third
quarter profit warnings come in early September, raising fears about
full-year results. Or that these autumn crashes used to be related to
the harvest, as Midwestern banks withdrew capital from New York.
(Still another theory cites seasonal affective disorder. Investors
simply get more risk-averse, and more prone to sell, as the days get
shorter. That’s the case argued by York University finance professor
Mark Kamstra and others.
So what, if anything, should you do?
In practical terms, maybe not that much. For most people, even a
performance difference of one or two percentage points isn’t going to
cover the transaction costs of selling before the end of August and
re-entering the market a month later. And stock market patterns aren’t
ironclad. The market may even jump in September, as it did in 2006 and
Perhaps the best you can do is brace for turmoil.