Will Septem­ber’s ‘sea­sonal slump’ trig­ger a much wider cor­rec­tion?

The Daily Telegraph - Your Money - - YOUR MONEY - Richard Dyson

Mar­kets have been be­calmed, go­ing nowhere for weeks. But, like much of Au­gust’s weather, there has been a per­sis­tent threat that a vi­o­lent storm is about to break.

Share prices are high by many mea­sures. Like bonds, shares yield less and less, but a thirst for in­come forces prices higher and yields lower still. The div­i­dends paid by ma­jor com­pa­nies are in many cases fac­ing cuts, yet de­mand re­mains strong.

Risk is ratch­et­ing up. Grow­ing num­bers of wealth man­agers and other pro­fes­sion­als are sound­ing warn­ing notes to clients. So what could trig­ger a snap? Some mar­ket his­to­ri­ans say that sud­den mar­ket turns have less to do with big, his­toric events than they do with in­vestor be­hav­iour. Writ­ing on in­vestor web­site Seek­ing Al­pha, Amer­i­can fund an­a­lyst Ron­ald Surz says: “There is only a weak con­nec­tion be­tween ma­jor events and mar­ket swings.

“Lit­tle has hap­pened his­tor­i­cally on the days of big mar­ket swings, and the mar­ket re­sponse has been ho-hum on big event days.”

Mr Surz reck­ons a cor­rec­tion could be­gin on the back of some­thing as in­con­se­quen­tial as the ar­rival of the month of Septem­ber – and the ev­i­dence is con­vinc­ing.

It’s hard to be­lieve, given that stock mar­kets are sup­posed to be ef­fi­cient, but years of data bear out a pat­tern in which (in Amer­i­can mar­kets es­pe­cially) Septem­ber gen­er­ates con­sis­tently poor re­turns.

Look­ing at 90 years’ worth of monthly re­turns for the S&P 500 in­dex – be­tween Jan­uary 1926 and July this year – Mr Surz con­cluded that only one cal­en­dar month re­turned less than zero, on av­er­age, over the pe­riod. That’s Septem­ber, with a re­turn of –0.7pc.

True, Septem­ber 1931 saw the S&P crash by an apoc­a­lyp­tic 29.7pc, so you might think this one year could colour av­er­age Septem­ber re­turns for decades.

Not so. In another mea­sure, Septem­ber is the only month in which pos­i­tive re­turns oc­curred less than 50pc of the time.

All other months, by con­trast, posted pos­i­tive re­turns by the S&P 500 more than 60pc of the time. One happy month – De­cem­ber – gen­er­ated pos­i­tive re­turns al­most 80pc of the time.

Sim­i­lar pat­terns have been noted in Bri­tish stocks, but they have not been as stark or quite as clearly repetitive.

Even so, Septem­ber is the worst month for av­er­age re­turns here, too, and one of only three (the other two are May and June) in which av­er­age re­turns over many decades come out neg­a­tive.

The other nine months all gen­er­ate av­er­age pos­i­tive fig­ures, with April be­ing the high­est.

That there should be such a sea­sonal pat­tern in re­turns is puz­zling. An­drew Clare, pro­fes­sor of as­set man­age­ment at Cass Busi­ness School, has writ­ten on the sub­ject and made this point: “If fund man­agers and other in­vestors were smart then no one would ex­pect this be­hav­iour to per­sist for very long.

“Ba­si­cally, in a mar­ket pop­u­lated by ra­tio­nal in­vestors, pre­dictable, sea­sonal pat­terns in in­vest­ment re­turns should not per­sist.”

These sea­sonal pat­terns have be­come mythol­o­gised in say­ings such as “Sell in May and go away”. That par­tic­u­lar adage isn’t borne out by the data, how­ever, as it ends “and come back on St Leger Day”, which is halfway through Septem­ber – the worst month.

The phe­nom­e­non is gen­er­ally ex­plained away by cy­cles in the tax year, or other sea­sonal fac­tors.

In­vestors are said to start sell­ing stocks in Septem­ber to crys­tallise losses for tax pur­poses. They go back into the mar­ket in the new tax year.

Whether this Septem­ber plays out to form, the mar­ket is anx­ious and di­rec­tion­less. Even gold, the “safe haven”, ex­cites wildly dif­fer­ent out­looks (see Page 4).

But as Andy Mer­ricks, of as­set man­ager Sk­er­ritt, con­cluded in a piece ti­tled “The cor­rec­tion is com­ing, but what can you do about it?”, all this is of in­ter­est but lit­tle prac­ti­cal use to long-term in­vestors.

“No gains are made in a straight line,” he wrote, “and in­creas­ingly in re­cent years, as volatil­ity has spiked, much of the an­nual gain (if there is one) has been con­cen­trated into just a few trad­ing days in the year.”

Stay put then. But brace your­self.

In Amer­i­can mar­kets es­pe­cially, Septem­ber gen­er­ates con­sis­tently poor re­turns

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