Some End of Year Optimism

by Jay Pestrichelli on August 30th, 2013

If you’ve been watching the financial news you have certainly heard on more than one occasion that September is the worst month for the equity markets.  So we thought we'd do a little digging and see what that actually meant.

What we found, going back to 195,0 was that September was indeed a negative month overall. Of the 63 years reviewed, the S&P 500 was higher in September only 28 times and lower 35 times. 55% decline rate didn’t really strike that much fear into me; so we dug a little deeper. The average gain in up years for September is 1.5% and the average loss in a down year is 2.0%. Again, the data wasn’t sending me rushing to pull the sell trigger.
 
If you’re the kind of investor that like to go against the herd, this seems like one of those opportunities. For the contrarian, getting long this market after a down August would seem enticing. If you did this and bucked the trend of “Sell in May and go away” you would have felt pretty smart this year.

Of the 28 times that September has been up since 1950, 13 (46%) of them have followed a lower August.  While those aren’t compelling odds, it’s not something to discourage the fortitude of any respectable contrarian (yes, I’m antagonizing here a little). Naturally, we’d recommend, as we always do, to hedge every investment and this is one nodifferent.
 
If you’d like to avoid the September valleys, you can use it as a barometer to read what happens the rest of the year.  Over time, October isn’t a particularly bad month. Since 1950 it has been up 37 times and down 26; a batting average of 58.7%. But what is more remarkable is that the 4th quarter (October through December) has been very strong. 49 out of 63 times (77.8%) the S&P has been higher from the end of September to the end of December.

What is more impressive is that of the 28 times September has been an up month, 23 times (82%) October through December has also been higher. So historically speaking, if September is higher, then the odds favor additional growth from October through the end of the year.
We think this is the real history lesson and that September’s story has always been whether the Fed was going to taper or not. While that is still in play of course, the data that drove a lower August isn’t suggesting a reduction of bond buying in our near future. History tells us that the way we are currently set up, the chance for a higher September through the end of the year is greater than not.


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