Naughty number nine, the month of September has a nasty reputation as a stock market bad boy.
“Over the past century, September has been by far the worst month on the calendar for the Dow Jones Industrial Average, with an average loss of 0.8%,” MarketWatch calculates. “That contrasts with an average gain of 0.8% in the other 11 months.”
The routs aren’t as bad for the broader market S&P 500 index, but still pretty scary. The Stock Trader’s Almanac tabulates that from 1950 to 2012, the S&P has lost an average of 0.6% in the month of September, the worst month of all behind February and June with losses of 0.1% each, and August with a loss of 0.04%, while the other eight months all average positive.
But in the last handful of years since the market bottomed in March of 2009, September seems to have had a change of heart, closing up in four of the last five outings. What has brought about change in attitude? Might we expect this new trend to continue this month too?
The September of Old
Of course, the month of September does have some seasonal characteristics that account for its consistently poor performance overall, which serve as an underlying disposition and leaning toward badness.
September, together with his bad girlfriend June, are the closing months of their respective quarters, which tend “to close weak due to end-of-quarter mutual fund portfolio restructuring,” the Almanac informs.
But September is especially bad considering that it marks the end of the summertime lull, at the end of the oft-heeded “sell in May and go away” mantra. Go away until when? Usually until the end of September. According to the Almanac, October begins each year’s bull run that generally stretches through December – the best month of all by far – and culminates in May.
As such, September is typically treated as the end of the annual bearish cycle, during which month investors and managers generally hold themselves back somewhat. In a sense, that September is a down month is something of a self-fulfilling prophesy, as the expectation of a rout keeps investors on the sidelines, amplifying its badness all the more.
To add insult to injury, the Almanac warns that the “September triple-witching week can be dangerous”, while the “week after is pitiful”. Triple-witching occurs in all four quarter-ending months (March, June, September and December), when the expiration of stock index futures (witch #1), stock index options (witch #2), and stock options (witch #3) all coincide on the same day – the third Friday of the month. Yet in September’s case the effect is worse for the reasons given above, as markets are thin and participation is low. Since 1991, the week following September’s triple-witching Friday ended down 16 times, while finishing up only 5 times.
Might we expect the same again this year? As they say, “Old habits die hard.”
“Yes, but this time it’s different,” the optimists proclaim. How many times have we heard that before?
Yet the optimists may be right after all. This time things do appear to be different.
September’s New Attitude
Looking at the last five Septembers since the stock market recovery began in 2009 we can clearly see September’s new attitude in the S&P 500 broader index, along with the major sectors as represented by the SPDR family of nine sector ETFs in the graphs below.
Of the last five September’s, four were up – with the S&P 500 index ranging from +2% (2012) to as much as +8.4% (2010). The only down September in the lot was 2011, in which the S&P fell a bitter 7.5%. I guess September still remembers how to be bad.
Just what might be accounting for this new attitude? There is only one thing that has been markedly different after 2009 than before – Federal Reserve stimulus and ultra low interest rates. How do we know? By looking at the sector breakdown in the graphs above, which give us plenty of examples of sectors performing according to interest rate influences, such as:
• The best performers were those sectors that benefit the most from low interest rates, such as technology, which ranked first in 2010, second in 2011, and fourth in 2009.
• Another top performer helped by low interest rates was the industrial sector, which ranked first in 2013, second in 2010, and second in 2009.
• Healthcare was also boosted by low interest rates, which came in first in 2012, fourth in 2011 and 2013, and fifth in 2010.
• Consumer discretionary was yet another sector aided by low interest rates, ranking second in 2013, third in 2009 and 2010, and fourth in 2012.
• The utility sector, which is primarily an income provider that pays as close as it can to the prevailing interest rate, has been the worst performer in up Septembers as the low interest rate environment has dragged it down while propelling the other sectors higher.
Ultimately, then, those sectors which are most sensitive to interest rates have flourished the most since the recovery began – such as technology and healthcare whose research and development departments are highly capital intensive, and the industrials in mining and the industrials including aerospace and defense, building products, construction and engineering, machinery, commercial services, air freight and logistics, airlines, marine, road and rail, which are also highly technological, capital intensive activities. Access to cheap capital has enabled them to refinance and pay-back older more expensive debt, reducing their expenses dramatically. They have also been able to borrow more capital to develop new products, medicines and properties. Consumer discretionary has also performed well as low interest rates encourage and facilitate more consumer spending.
Which September Will Greet Us?
It remains to be seen which personality the month of September will show us this year – whether it be his happy-go-lucky, easy-spending new attitude we’ve seen these last five years since the recovery began, or if he reverts back to his old pre-recession bad boy image.
But there is one thing investors can be sure of… we must remain invested, as the Fed’s cheap-and-easy-money policy will continue for some time yet. Yes, interest rates are expected to begin rising in mid-to-late 2015. But they will do so gradually, with most analysts expecting them to top-out at around 3% by 2017-18, and to remain there for a year or two unchanged.
The future for the stock market will still remain highly accommodative, and the sectors should perform more-or-less along the same pattern they have shown us so far. Even if September bucks his recent up trend and falls this month, we would do well to welcome it as a great buying opportunity, buying what we can. For once October marches in, there’ll be no looking back until at least next spring.