September is notorious for strong seasonal cross currents on Wall Street. Some of them may have enough statistical and theoretical support to justify betting on them.
Perhaps the most well-known fact is that September was a terrible month for stocks. Little did he know that it was considered the best month for the golden calendar.
Consider the performance of gold since December 31, 1974, when it became legal for US citizens to own it. since then,
Gold bullion
The US dollar averaged a 1.8% gain in September, more than four times the 0.4% average for the other 11 months of the calendar. It was just the case of reverse stocks: the
Dow Jones Industrial Average
In the year It has lost an average of 1.0% in September since 1975, compared to an average gain of 1.0% for all months.
The Dow is up far longer than it has been since 1975, of course, and September was the worst average in that long history, too. Since the benchmark’s inception in 1896, September has posted an average loss of 1.1%, compared to other months with an average gain of 0.8%. September’s worst relative performance has been remarkably consistent: relative to the other 11 months, the return has been one, albeit below average, for every decade since 1900.
In light of this, the difference in the mean return of the Dow between September and other months at the 95% confidence level is not surprising given that statisticians often assess that the pattern is likely to be real.
Gold’s September record is less consistent. For a decade or so, September was the best month on the calendar for gold. Since then, he’s been the worst, and this latest experience weakens — though doesn’t eliminate — the statistical case for Gold being September’s All-Star. For the period since 1975, that statistic is slightly more significant—only at the 90% confidence level, rather than the traditional 95% level.
Why Stocks May Be Weak in September
Regardless of the strength of the statistical case in favor of a current pattern, you shouldn’t bet your persistence unless there is a compelling theoretical case for why it should exist in the first place.
After years of insisting that no such case exists for stocks, a recent study in the Journal of Financial and Quantitative Analysis has changed my mind. The rightful “Contemporary Asset Allocation: Evidence from Mutual Fund Flows”. The study was conducted by Mark Kamstra of York University in Canada; Lisa Kramer of the University of Toronto; the late Maurice Levy of the University of British Columbia; and Russ Weimers of the University of Maryland. They found strong evidence for this Current affective disorder (SAD) is the source of September’s weak stock market performance.
In fact, SAD is depression associated with the change of seasons. Many people suffer from SAD during the winter months, so few of us associate it with September. But what affects the stock market is not how many suffer from SAD, but changes in that number. And for people suffering from SAD, the biggest month-to-month change, according to psychological data, occurs between August and September.
The authors of this latest study linked these monthly SAD changes to the stock market by measuring the flow of money into and out of equity mutual funds. After controlling for other possible factors that could explain those flows, the researchers found a significant correlation between SAD incidence and equity mutual fund flows. The largest net outflow month is September.
Both a strong statistical and a strong theoretical case for why September could be a below-average month for stocks. While this doesn’t guarantee that the stock market will lose ground next September, it does increase the likelihood of a decline.
Why Gold May Do Better in September
There are reasons why gold will do well in September, but they’re weaker than why stocks should be. The only academic study that shows a good performance trend in September, at least that I’m aware of, was conducted a decade ago by Dirk Bauer, a finance professor at the University of Western Australia. In a 2012 study, titled “The Seasonality of Gold—The Fall Effect” He speculated that this trend could be caused by several factors, including the SAD factor, which explains the stock’s weak September prospects. Another possibility is the demand for jewelry in India ahead of Diwali, that country’s annual “Festival of Lights” that occurs in October or November. (This year Diwali is celebrated on November 12.)
Baur emphasizes in his research that these hypotheses are only hypotheses. In a recent email, September may have ceased to be a good month for gold in recent years because enough investors have recognized the current pattern and tried to profit—and thus killed the goose that lays the golden egg. By jumping the gun and buying gold in August instead of September, they carried September’s profits into August. Since 2010, August has been the best month for the gold calendar.
The bottom line: Betting that gold will do well in September is more speculative than betting that stocks won’t.
Corrections and enhancements
Diwali is the Hindu festival of lights. An earlier version of this column incorrectly gave the name as Denali.
Mark Hulbert is a regular contributor to Barron’s. His Hulbert ratings Monitors investment newsletters that pay for audits. He can be reached at [email protected]..
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