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