A Tale of Two Septembers

Here are the stock market performance facts re September, courtesy Wall Street’s keeper of the historical keys, Sam Stovall:

“Investors may have a reason to fear a set-back in September. No matter if you look back to 1990, 1970, 1945 or 1929, the S&P 500 posted its worst monthly performance in September, losing 1.3% on average since 1929 versus an average monthly advance of 0.54%. What’s more, the “500” has declined an average 56% of the time, versus only 42% for all months, making September the worst month for frequencies of declines. However, during the 14 Septembers immediately following the end of bear markets since 1932, instead of posting the average 1.3% decline, the S&P 500 gained a median 2.0%. What’s more, the frequency of declines – at 36% following the end of bear markets – was substantially better than the average 56% for all years. Yet history should always be looked upon as a guide, not gospel.”*

While nearly every investor knows the first fact cited by Sam – that September tends to be one nasty month for equities – what many may not know is the second point he makes: how September tends to perform AFTER the end of the bear. And therein lies the decision-making rub – especially for those of us who don’t buy into the Barton Biggs’ strongly bullish argument** that above historical average P/Es are appropriate in the current climate AND earnings are likely to surprise to the upside – the combination sweet spot for equities.

Investment Strategy Implications

When markets reach the outer band of their valuation range, crosscurrents are more likely. Additionally, given the highly correlated nature of the markets (thanks to the dominance of momentum investing among professional investors), sharp swings at market extremes become more common. Moreover, after months of progressively higher highs, with virtually no correction along the way, one could and should assume that such a relatively low volatility environment will come to an end.

And in that end, September may turn out to be as changeable as the season it ushers in: putting in a bullish first half followed by a sharp move to the downside to end the month. Head fakes abound as a tale of two Septembers unfolds.

*Sector Watch, August 31, 2009
**Bloomberg Surveillance, August 28, 2009