With September nearly upon us, many mourn the end of summer[i] as they take shelter in a local Starbucks to sip way-too-soon pumpkin spice lattes. Meanwhile, some warn investors should take shelter in cash or bonds for the next two months—dubbed “financial hurricane season” for its historically subpar returns. But we believe this is a misnomer. As with all alleged seasonal stock market patterns, financial hurricane season is a classic case of correlation without causation—a statistical anomaly with no basis in fundamental forces. Acting on such trivia is, in our view, an investment process error.
Since reliable S&P 500 data begin in 1925, September is the only month with a negative average return (-0.62%).[ii] October’s historical average return (0.70%) ranks third from the bottom of the Calendar Power Rankings and also below the overall monthly average of 0.95%.[iii] But, more notably, a few major market events have struck during this month, leading some to dub it, “The Month of Market Crashes.”
Folks usually offer up fairly little in way of explaining the phenomenon. Some argue September’s weakness is tied to investors “cleaning out” their accounts prior to quarter-end, which makes little to no sense. March, June and December occur at the same point in the quarter, yet returns are fine. But it is very common for folks to simply cite both months as weak and tie it to current fears. Last year it was North Korea. 2016? The election, duh. Today, calendar-based concerns are once again mixed with preexisting fears—like midterms, White House drama, trade negotiation deadlines, valuation concerns and more.
However, historical data don’t make a convincing case for sitting this “hurricane season” out. At 52.2%, September’s historical frequency of positivity is the lowest of any month—but it is still up more than half the time.[iv] The average return, meanwhile, is -0.62%—but this is largely thanks to a few extreme negative outliers.[v] Like 2008 (-8.9%), 2001 – 2002 (-8.1% and -10.9% respectively), 1937 (-13.8%) and 1931 (a doozy at -29.6%).[vi] Each came during a bear market that we humbly submit cannot be laid at September’s doorstep. Exclude these five years, and September’s average return rises to 0.17%—not quite so shabby.[vii]
Similarly, October’s reputation as the “Month of Crashes” rests on a few high-profile coincidences. To wit:
But despite these three awful Octobers, there have been some very bangish ones as well—each of which represented huge buying opportunities. Consider 1974 (16.8%), 1982 (11.5%) and 2011 (10.9%): Not only were these great months, but the first two came very early in bull markets—a great time to own stocks.[xi]
Regardless of what the averages and data say, this is all mere correlation without causation—always a poor basis for investment decisions, in our view. Those historically terrible Octobers and Septembers shared something key: fundamental causes. Rather than stemming from special month-specific powers or recurring investor-behavior-driven patterns, they coincided with actually negative events for markets. This makes the relationship between returns and calendar months correlation, pure and simple. And this isn’t some arcane statistics quibble—it represents a critical logical failure. Without solid evidence demonstrating a fundamental connection, correlations are just curiosities—interesting trivia, nothing more.[xii] We believe sound investing is based on ideas, reasons and cause and effect. It is fundamentally forward-looking—like stocks—and not based on spurious correlations or backward-looking statistical oddities that could fall apart at any time.
Maybe we see some volatility this fall—always possible! But we don’t see drivers suggesting a bear market—a fundamentally driven, lasting drop exceeding -20%—is likely in the near future. And whatever happens in September and October, rest assured: It won’t be because the calendar flipped.
[i] Yes, we know summer technically doesn’t end until September 22 this year, when the autumnal equinox (aka the September equinox, aka the Southward equinox) marks the Official Turning o’ the Season.
[ii] Source: Global Financial Data, Inc., as of 8/29/2018. S&P 500 average monthly total return for September, 1926 – 2017.
[iii] Ibid. S&P 500 average monthly total return for October and overall monthly average, 1926 – 2017. Also, Calendar Power Rankings aren’t real.
[vi] Ibid. S&P 500 Total Return Index, monthly returns for September 2008, September 2001 – 2002, 1937 and 1931.
[vii] Ibid. Based on the S&P 500 Total Return Index, monthly returns, January 1925 – August 2018.
[viii] Ibid. S&P 500 Total Return Index, monthly returns for October 1929.
[ix] Ibid. S&P 500 Total Return Index, monthly returns for October 1987.
[x] Ibid. S&P 500 Total Return Index, monthly returns for October 2008.
[xi] Ibid. S&P 500 Total Return Index, monthly returns for October 2011, October 1982 and October 1974.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.