Which Month Is Bad for the Stock Market?

Which Month Is Bad for the Stock Market? Historically, the worst month for the stock market is September. In US markets, September has seen an average S&P 500 decline of 0.5 percent since 1950. The Dow Jones Industrial Average has fared even worse, losing an average of 0.8 percent over the same period.

 

Intriguingly, September losses aren’t confined to US markets. International stocks are approximately as likely to experience losses during this month. In all probability, this effect is the result of US stocks dragging down global markets.

 

There are several possible explanations for this so-called “September effect.” One compelling argument involves selling by mutual funds. Many of these funds end their fiscal years in September, making them more likely to sell positions and rebalance their portfolios. This large amount of selling, the argument suggests, drives down prices reliably in September.

 

A second common explanation is that investors become more active in the autumn after going on vacation during the summer months. This explanation suggests that investors sell profitable positions and rebalance their portfolios in September, triggering a modest dip in overall stock prices.

 

While there may be some truth to this historically, this explanation is a bit less likely in today’s world of instantaneous mobile trading apps.

 

Since 1950, only two other months have historically yielded negative average returns for the S&P 500: February and August.

 

February’s average loss is tiny, coming in at just -0.09 percent. August is only slightly more pronounced at -0.13 percent.

 

Both, however, are far better than the losses historically seen in September. August losses may be driven by similar forces to those that depress the market in September. February is most likely anomalous, given how small the decline typically is during the month.

 

Just as there are months where the market is likely to underperform, there are some in which it historically outperforms.

 

One such month is January, leading to what’s known as the January effect. Like the September effect, there’s no established explanation for this trend.

 

One suggested reason is that retail traders are more likely to sell in December in order to solidify their positions before tax season, then reinvest in January. This does seem to explain why the January effect has an outsized impact on small-cap stocks, which are most commonly held by retail investors.

 

A similar phenomenon occurs in December, earning it the title of a “Santa Claus rally.” This rally typically takes place in the final week of December.

 

The Santa Claus rally may be due to the investment of holiday bonus pay or a generally optimistic feeling about earnings after a successful holiday season. Interestingly, the Santa Claus rally is one of the most reliable calendar phenomena in the stock market, taking place about two-thirds of the time.

 

November and April also fall into the category of heavily positive months. These are more difficult to explain, though April’s rise could be in part driven by investors choosing to invest their tax returns.

 

Observers of these calendar effects have, of course, tried to construct strategies that take advantage of them. By far the best known of these is the famous investment axiom “sell in May and go away.” This strategy involves selling stocks in May and buying again at the end of October.

 

Hypothetically, this approach would allow investors to take advantage of the boom months of November, December, January and April while avoiding the pitfalls of August and September.

 

This strategy, however, has several pitfalls. To begin with, it assumes investors can reliably time the market. This has been shown over long periods of time not to be the case. Timing the market can occasionally produce positive results, but it appears to be all but impossible over the course of an investment career.

 

The strategy would also work against itself if too many people employed it. If a substantial portion of traders sold in May, stock prices would plummet going into the summer.

 

November’s gains would be much more pronounced as investors bought back in, but December and January would likely see less buying activity. Ultimately, the seasonal cycle would become distorted by investors trying to take advantage of it.

 

The downfall of such market timing strategies is that they ignore the intrinsic value of publicly traded businesses in favor of calendar phenomena.

 

Prices may fluctuate month to month, but the true value of the business being traded remains more or less the same. Investing based on price fluctuations, therefore, could easily result in paying too much for a stock.

 

While these effects are certainly interesting, none of them are consistent enough to be used in making investment decisions. These month-to-month differences in the stock market are essentially market anomalies. Using them to time the market will not guarantee success.

 

Even the relatively reliable September effect, for example, only applies a slight majority of the time. Stocks rise in September about 45 percent of the time. Attempting to sell to avoid September losses, therefore, would also lock out the strong possibility of September gains.

 

At the end of the day, seasonality in the stock market is a real phenomenon, but it’s far too inconsistent to use as a predictive investment tool. Because of this, it’s far better to focus on the value, fundamentals and overall prospects of the businesses you’re buying shares in.

 

This approach has been consistently successful over many decades, while attempts to time the market have consistently failed.

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