SERIOUS MONEY:September and October have been the worst months, historically, for investing in stocks, writes CHARLIE FELL
MARK TWAIN, the celebrated 19th century American author, wrote in the ironic 1894 novel, Pudd’nhead Wilson, that “October . . . is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February”.
Twain may well have been an excellent writer, with The Adventures of Huckleberry Finn and Tom Sawyer to his credit but he possessed little investment acumen. Indeed, in the very same year that Pudd’nhead Wilson was published, he filed for bankruptcy, having squandered a substantial amount of money in new inventions, most notably the Paige typesetting machine.
He invested the equivalent of $7 million (€4.9 million) in the typesetting machine but unfortunately for the author, it was made obsolete by the Linotype before it could be perfected. Twain’s investment losses were compounded by financial difficulties at his publishing house and aged 59 he lost not only the bulk of his book profits but also a large share of his wife Livy’s inheritance.
It is clear that Mark Twain does not rank among the world’s greatest investors, but his words in Pudd’nhead Wilson were not that wide of the mark. It is not October but September that has historically been the worst month “to speculate in stocks”.
Indeed, it is the only month to generate a negative mean return through time, including reinvested dividends. The mean return has been minus 0.25 per cent since 1802 and one dollar invested in the Dow only in the month of September since 1885 would be worth just 16 cents today, excluding dividends.
September’s dampening effect on investment performance is not only a US phenomenon but is also apparent in the rest of the world, with 16 of 20 countries and all major world indices recording the worst returns during the month. Furthermore, the autumnal effect has not become less pronounced through time with stock prices declining in six of the past 10 years and in 15 of the past 25 Septembers. The odds are clearly stacked against positive returns as summer peters out and autumn takes hold.
The month of September may have historically proved bad for equity investors but as Mark Twain correctly pinpointed, they have not fared an awful lot better in October.
It is the second-worst month of the year and investors have earned higher returns through time via an investment in low-risk Treasury bills rather than risky stocks over September and October combined. The historical record shows that the Jay Cooke panic of 1873 struck in September, the collapse of the Knickerbocker Trust and the panic of 1907 in October, the crash of 1929 in October, the infamous Black Monday of 1987 in September, the United Airlines mini-crash of 1989 in October, the 1997 attack on the Hong Kong dollar in October, and the failure of Lehman Brothers last year in September.
Even random events have proved unkind to investors during early autumn including the terrorist bomb that shook Wall Street on September 16th, 1920, president Eisenhower’s heart attack on September 26th, 1955, and of course the World Trade Centre and Pentagon terrorist attacks on September 11th, 2001.
The behaviour of stock returns during September and October is inconsistent with established investment theory and has puzzled both academics and practitioners alike. The pressure on stock prices during late summer and early autumn may well have been a function of seasonal financing needs in the 19th century as midwestern banks withdrew capital from New York at harvest time. However, plausible explanations for the anomaly have been hard to come by in modern times.
It has been suggested that window dressing by mutual funds as their year-end approaches drives down prices, but this explanation does not stand up to serious scrutiny. Others believe that profit warnings in early September raise concerns over full-year results but once again the evidence comes up short.
A more convincing explanation is psychological. The depressing effect of the approach of winter and rapidly shortening daylight is believed to lead to greater risk aversion and thus, to reduced equity allocations. Indeed, the impact of sunlight on well-being is well documented and serotonin irregularities in the brain are known to produce depression. The link between depression and lower risk-taking is also well established. The seasonal variation in returns across a number of countries shows that the autumnal effect is most pronounced in countries that are farthest north from the equator. Thus, shorter days and reduced sunlight do appear to have a tangible effect on stock prices. The evidence is corroborated by the fact that stock prices perform better on days that are sunny rather than overcast.
September has arrived and investors have every right to be nervous as the historical data shows that it has been the cruellest month. The back-to-school blues brought on by reduced daylight hours set the stage for poor performance. In the words penned by the poet Thomas Kinsella in Another September – “Dreams fled away . . . And balances – down the lampless darkness they came”.
