29. Aug 2018
In our last Seasonal Insights we have mixed things up a little bit and talked to you about the media sector – an industry that performs very poorly during the month of August. Upon your positive feedback we have decided to build up on this topic. In this week’s issue we are going to talk about some international markets that exhibit negative patterns during September and we will try to find some reasons for this recurring trend.
When you ask investors what they think is the worst time of the year to invest, most would reply that it is October. As subscribers to this newsletter, you most probably have some knowledge about Black Friday (1929) and Black Monday (1987). In both cases, turbulent events in the US, namely panic-fueled disposal of stocks and a resulting sharp decline in prices, led to a worldwide crisis on the markets. These two events represent the most drastic declines in stock prices of the 20th century – and they both happened in October. The conclusion that October is a tough month to invest seems logic. However, looking at the numbers, September is the month of the year where finding profitable investment opportunities is even harder. According to Lim (2017), the S&P 500 has lost an average of 0.7% during September since World War II. Additionally, the worst economic period since The Great Depression of the 1930’s was triggered by another event – the 2008 financial crisis. And fittingly, its sad climax was the Lehman bankruptcy – September 15.
What are the reasons for the typical struggle of the markets in September? There is no definite answer, but we believe there is more than just one reason. Firstly, like most people in the Western hemisphere, investors like to go on vacation in summer. The month of August is a traditional month for vacations. Since they tend to keep their portfolio during this time, trading volumes decline. Once these investors get back to work, the first thing they do is exit positions they were planning on exiting anyway (Gallant, 2018). Once this behavior becomes a trend, there is a decline in prices. Another potential reason is that most mutual funds close their fiscal year at the end of September. Consequently, they typically try and sell losing positions before the end of the year. Both of these trends lead to high volume sales and, as a result, declining prices on the markets.
Again, we have used our Web App to analyze this phenomenon, in order to go beyond simple truisms and supply you with hard statistical evidence. That’s why we have analyzed the biggest international indices to come up with a selection of three of these patterns, exhibiting the aforementioned trend.
The first index we have analyzed is the NASDAQ 100. It is a stock market index that is made up of the 100 largest non-financial companies listed on the NASDAQ. As you can see, the financial crisis of 2008 hit the index severely but based on the last 20 years, there is clear evidence for a recurring pattern in the respective time-period during September.
The NASDAQ 100 posted massive losses in 2008 – but a general pattern can be observed nevertheless.
Source: Seasonax Web App
The second index we examined is the FTSE All-Share Index, a capitalization-weighted index that comprises more than 600 companies from the London Stock Exchange. It is an aggregation of the FTSE 100, FTSE 250 and FTSE SmallCap Index. Although there were some profitable years (2007 and 2009 in particular), the general trend of the last 20 years is clear – the market is bearish during September.
A clear bearish pattern can be observed for the FTSE All-Share Index.
Source: Seasonax Web App
As our third pattern, we have examined the Euro Stoxx 50. Owned by Deutsche Börse Group, it is designed to represent the largest super-sector leaders in the Euro Zone in terms of free-float market capitalization. Like before, we can observe a clear bearish pattern in September. The graphic visualization of the chart shows clearly what we have stated before – September and October are by far the two worst performing months.
The Euro Stoxx 50 exhibits a clear downturn during September and October.
Source: Seasonax Web App
Our analysis shows that there is clear statistical evidence for bearish patterns during September in the largest stock markets around the globe. Whether this is because of fear of another big crash in October, the prolonged holidays or fiscal reasons cannot be finally determined. Nevertheless, we consider it important to not just numerically analyze these phenomena but to go beyond and try and understand seasonal patterns. We would be very happy to hear from you regarding your opinion of why there is a traditional slump in September. Simply write us at support(at)seasonax.com!
What do you take away from this week’s Seasonal Insights? Firstly, that you need to act with great caution during the month of September and that October is not very friendly to most investors either. However, bear in mind that the markets are picking up their pace in fall and start building up toward the year-end rally.
You can use our application to find investment opportunities for cyclical portfolio decisions and thoroughly analyze them before making your move. As always, there cannot be any guarantees in the market, but you can certainly let probabilities work in your favor!