Exposed: The "September Effect"

The Panic of 1907. The Crash of 1929. “Black Monday” 1987.

What do they share in common?

They all fell in October.

October’s record is so felonious that market observers have fashioned a term for it — the “October effect.”

But is it true? Is October worthy of its blackened name?

Today we haul the defendant into the dock… interrogate its record… and render verdict.

But let us first look in on today’s court proceedings…

All the major indexes flash red as we write.

The Dow is off 49 points… the S&P is off four… the Nasdaq is off six.

But gold caught a fair wind today — up a hale and hearty $14.

Uncertainty, be it political, geopolitical or meteorological, appears the dominant note right now.

But returning to the question of the hour… is October the great menace it’s alleged to be?

History says… no.

The mocking gods of chance appear more responsible for October’s bankrupt reputation…

Stephen Williamson, vice president of the St. Louis Fed:

Stock market crashes have occurred sufficiently infrequently in history that there is not enough evidence on when they are more likely to occur.

Meantime, Yardeni Research proves the average October return over time is 0.4%.

A slender gain — but a gain.

And Investopedia informs us that more bear markets have ended in October than have begun in October.

Downturns in 1987, 1990, 2001 and 2002 all reversed in October.

It appears an innocent man has been pitched into infamy… and sent to the gallows under false charges.

But if October isn’t the market menace it’s alleged to be, does another month take its place?


Which month?

September — this month.

“Since the Dow Jones industrial average was created in the late 1890s,” financial columnist Mark Hulbert notes, “September has produced an average loss of 1.1%.”

“The 11 other months of the calendar,” Hulbert adds, “have produced an average gain of 0.8%.”

Nor can one or two renegade years account for September’s villainous record, according to Hulbert:

“On the contrary, the month has an impressively consistent record at or near the bottom of the rankings.”

September’s mischief likewise afflicts the S&P.

Bank of America Merrill Lynch strategist Savita Subramanian shows its median September return has been negative… stretching back to 1928.

The evidence, in graphic form:

September is seasonally the weakest month of the year

The “September effect” seems more a thing than any “October effect.”

But let us hear no more of Septembers past.

What about September present?

Stocks have opened the month in a state of confusion… uncertain of their bearings, or direction of travel.

But stocks misstepped again today.

Of course we’re only one week into the month.

But the three weeks ahead are potentially rows of dragons’ teeth.

North Korea may have tested a hydrogen bomb over the weekend… and the crisis is escalating…

A second raging hurricane threatens life, property and the rhythms of American commerce…

A debt ceiling crisis — and a possible government shutdown — could heave markets into chaos after Sept. 29…

Meantime, stocks are wildly overvalued by historical metrics…

Yet despite all logic, all reason, volatility remains fixed on low settings.

Added together, Jim Rickards says the stock market is “like dry kindling waiting for a match”:

The signs are everywhere that the stock market is in a subcritical state with the potential to go critical and melt down at any moment… The problem with an out-of-control forest fire or a market meltdown is that it’s difficult to contain. Forest fires can start in small areas and quickly spread to hundreds of thousands of acres.

Likewise, there’s no guarantee that a stock market meltdown will be contained to stocks. Panic can quickly spread to bonds, emerging markets and currencies in a general liquidity crisis, as happened in 2008.

“The best defenses are cash and gold,” Jim advises. “With gold you preserve wealth (because there’s no credit risk), and with cash you can pick up bargains when the dust clears.”

Words to the wise, perhaps, for the wise.

Do we hazard our own prediction of September doom?

Of course not.

Here at The Daily Reckoning, our curiosity is strong… but our commitments weak.

“Sometimes right… sometimes wrong… and always in doubt… we just try to connect the dots,” in the words of our founder Bill Bonner.

We are nonetheless duty-bound to remind you that September is one of the most dangerous months to speculate in stocks.

Along with, as the great scalawag Mark Twain noted…

July, January, April, November, May, March, October, June, December, August and February.


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning