September Effect and Other Months

Since 1896, the Dow’s average monthly return has been 0.66%; the number increases to 0.75% if you exclude September. The table below shows average monthly returns for the DJIA since 1896 and through 2012 (source: Hulbert Financial Digest).

 

DJIA Average Monthly Return  [1896-2012]

 

Month  (return)	Month  (return)	Month  (return)
Jan.  (1.01%)	May  (-0.08%)	Sept.  (-1.09%)
Feb.  (-0.19%)	June  (0.24%)	Oct.  (0.28%)
Mar.  (0.83%)	July  (1.46%)	Nov.  (0.91%)
Apr.  (1.21%)	Aug.  (1.13%)	Dec.  (1.42%)

 

There is no rational reason why September has been a poor month for stocks. One justification is mutual funds often sell positions toward the end of their fiscal year, which is often in the fall. Selling losers can help reduce capital gains distributions for tax purposes. This strategy has been used by mutual funds since a 1990 tax law change. However, since the tax law change, September returns have actually lagged behind other months less. Moreover, only 11% of U.S. stock fund assets are invested in funds whose fiscal year ends in September (source: Lipper).

 

The idea of funds selling positions in September, thereby causing Dow losses, is further weakened because 35% of U.S. stock fund assets are in funds whose fiscal year ends in December, the Dow’s second-best performing month (up an average of 1.42%).

 

Another rationale behind the September effect is investors returning from summer vacation decide to sell stocks after their vacation. However, a seasonal stock expert (Ben Jacobsen, Massey University in New Zealand) has stated such evidence is “mixed at best.” In fact, one study cited by Jacobsen shows the bulk of selling takes place before investors go on vacation.

 

Perhaps the best stock pattern advice was by Lawrence Tint, former U.S. CEO of Barclays Global Investors: “Unless you are able to discover something nobody else knows about, by the time we know why a pattern exists, it’s too late to profit from it.”