There are lots of studies that analyze the so-called “seasonality” of market behavior. The most well-known is probably that of “Sell in May and go away,” which is backed up by statistics showing that the market has historically produced most of its returns in a given year during the November-April period, implying that investors are better off to simply sell in May, and go away for the summer and early fall. Due to the events of the past year, however, that hasn’t played out as expected – from last November through this past April, the S&P 500 lost -10%. Meanwhile, it’s gained 17% since April. So, the current cycle is a good example that there are always exceptions to accepted wisdoms, and that things often play out much differently than historical averages might suggest.
Now that September has started, is there any reason for investors to be concerned, strictly based on the calendar? Some would say yes, and they would have plenty of ammo to back up their argument. According to Ned Davis Research, since 1926 the S&P 500’s average return in September is actually a loss of -1.1%, and positive returns have occurred in less than half of the 82 Septembers in the sample (45%, to be exact), making it the worst month out of the year by both measures. In addition, the September-October period in particular has hosted many of the most notorious events in stock market history, such as the “Black Monday” stock market crash in 1987. Just last year, Lehman Brothers failure on September 15th triggered a -40% collapse into the November 20th market bottom. Since that painful event is still so fresh in investors’ minds, it’s understandable that anxiety levels may be creeping higher as we enter fall, especially since the market has rallied +50% off of the March 9th low.
So, since the seasonal pattern seems to be changing to a historically unfavorable environment, is it time for investors to sell and get more defensive? While it’s important to be aware of, we don’t necessarily think that will be the case this time. With the market having moved up aggressively, it may be due for another breather, perhaps something similar to the -7% correction that occurred during June/July. But, with an economic recovery underway, we wouldn’t be surprised if this fall plays out much differently than last year, with a more favorable outcome for investors this time.
