Welcome To September

Kaeppel's Corner: Welcome To September

By Jay Kaeppel, Optionetics.com | 10 September 2008

Yes, indeed, welcome to the month of September, stock market investors. Quick, cue the scary music! That catchy riff from the shower scene in the movie "Psycho" should suffice. Think I’m being rash? Perhaps overstating things a bit? Well, as always, the "numbers tell all." And as you will see, the numbers regarding September ain’t pretty. The simple fact is that the month of September has been by far the worst performing month for the Dow Jones Industrial Average over the past 100+ years. This is interesting because when most investors think of a bad month for the stock market they think of October. This is likely due to the fact that the stock market has had a nasty habit of "crashing" from time to time during the month of October. Sure, I guess that could explain the bad reputation. Even today the specter of the Crash of October 1929 still sends shivers down the spines of many investors as history portrays this event as ushering in the era of the Great Depression. The accompanying vision of a giant tumbleweed blowing through town [[and those clouds of dust; never forget those clouds of dust! : normxxx]] still give some investors pause to wonder if they should bother with the stock market at all.

Investors of a certain age— ouch, was that a new ache or pain I just felt?— well remember the Crash of 1987 when the Dow lost 22% in a single day. While that was a devastating event for many, the long term results were somewhat mitigated by the fact that the Dow essentially bottomed out that day and resumed a longer-term uptrend shortly thereafter. Other market "crashes"— for now roughly defined as a sharp sudden decline in the stock market contained within a given month— include 1978, 1979, 1989, 1997, 1998.

So clearly the month of October is not to be trusted. Nevertheless, over the long run, the month October— crashes and all— has been a day in the park compared to September [[especially since October often marks the bottom of the Autumnal downdraft, whereas September often marks its beginning.: normxxx]]. Under the category of "a picture is worth a thousand words", Chart 1 displays the growth— or more accurately, the destruction— of $1,000 invested in the Dow only during the month of September every year since 1900. The results speak for themselves. $1,000 invested only during September since 1900 would today be worth just $259. This represents a staggering loss of -74.1%. To put this in better perspective, this loss occurred within the context of an overall gain in excess of +16,700% by the Dow. How’s that for "underperformance"?

Chart 1— $1,000 invested in the Dow only during the month of September 1900 to present

Fortunately for me (or unfortunately as the case may be), as a lifelong "statistics geek" as well as a lifelong Cubs fan, I’m pretty used to looking at "ugly" numbers. Below are some of the "unhappy totals" regarding the performance numbers for the Dow during the month of September over the past 108 years.

• The average daily gain during the month of September was (-0.000492%).


• The average daily gain during all other trading days was +0.000307%.


• The annualized rate of return during the month of September was (-11.7%).


• The annualized rate of return during all other trading days was +8.0%.


• The Dow posted a gain during 45 of 108 months of September, or 42% of the time.

So clearly the month of September has not been "happy time" for stock investors over the past century. But hey, just like the Cubs, any month (or team) can have a bad century now and then. September 2008 opened with a loss of -2.8% in the first four trading days. At the very least you have to respect consistency. So at this point for stock investors it’s kind of like the same situation experienced by lifelong Cubs fans when the Cubs are in first place in early September. It’s hard to know whether to stand up and cheer or to curl up in a ball and say "tell me when it’s over", possibly peeking out of one eye once in a while.

For now simply consider how an investor (okay, admittedly one with a crystal ball who could have foreseen in January 1900 that September would be a disaster for stocks over the next 108 years) might have fared if he or she had simply skipped the month of September every year since then. Chart 2 displays the growth of $1,000 invested in the Dow on a buy-and-hold basis since 1900 as well as the growth of $1,000 invested in the Dow at all times except the month of September during the same time frame. As you can see, by once again applying the theory of "addition by subtraction", sitting out the month of September would have improved an investor’s performance exponentially.

Chart 2— Buy and hold and Buy and hold minus September

By 9/5/2008, $1,000 invested in the Dow on a buy and hold basis would have been worth $168,458. Had an investor simply moved into cash at the end of August each year and then back into stocks at the end of September, that same $1,000 would have grown to $650,110, a gain of about 3.9 times as much as could have been gained by simply buying and holding.

Summary

Please remember that the implication here is not that the month of September is absolutely, positively guaranteed to decline each and every year. In fact, far from it as 45 of the past 108 years have witnessed a September gain in stock prices— let’s call it a "September surprise." Still, investors should clearly be cautious. On the brighter side, if the major market averages retest their yearly lows during the month of September and are able to hold, we might ultimately look back at September as a buying opportunity.

So please remember (now and always) that "being cautious" and "sticking one’s head in the sand" are two very different things.

To search for previous articles written by Jay Kaeppel, please click here.

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Normxxx    
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