Navigating Wall Street’s Post-Summer Blues
“Wake me up when September ends,” goes the popular song by the band Green Day. Many investors can certainly relate to that sentiment. Historically, September isn’t a good month for stocks.
September is the only month, going back 100 years, with a negative monthly return in the market. Various explanations have been offered to explain this September effect. Some have suggested that it’s caused by investors returning from summer vacation and taking profits that accrued over the summer.
This September has certainly started off on a negative footing. On Friday the Dow Jones Industrial Average declined for a fifth straight day over economic uncertainty. All major indices are down for the month to date. Investors are worried about the current COVID wave potentially slowing the economy, just as the threat of inflation causes the Federal Reserve to tighten monetary policy.
Likewise, October is historically the most volatile month in the market. Some of the biggest stock market crashes in history, including the big ones in 1929 and 1987, took place in October. There isn’t a strong causal relationship that explains the seasonal weakness. It appears to be more than anything a historical anomaly, but investors have learned to be wary in these months.
Beyond the September and October effects, there are December and January effects that have better causal relationships. In December, many investors engage in tax-loss harvesting. This means selling companies that are in the red to offset other gains in your portfolio. That increases selling pressure in December, especially among companies that have had a down year.
If you have capital gains in your portfolio, you can offset them by selling companies that are in the red. This activity, aka tax-loss harvesting, can lower your taxable gains. But it also means that companies that are down for the year can face increased selling pressure in December.
But not all seasonal effects are negative. The new year brings the January effect, which usually results in a market rise. There are a number of factors that explain this effect, including a reinvestment of some of the tax loss harvesting that occurred in December.
How should investors play these months? Optimism about the economy has declined lately, but some of the best market performances ever have happened when the economic outlook was grim.
My philosophy is to never try to time the markets. Over time the market rises, so as long as we are consistently investing, the down periods won’t have any lasting impact.
Besides, there aren’t compelling reasons to believe that the historical performance of the market during these months is indicative of future performance. I trade stocks during these months just as I do in any others. I don’t put more cash on the sidelines. I just execute just as I do in any other month.
One thing that might impact your trades is the seasonal volatility. As volatility spikes, which it has done since this September began, option premiums for many securities will rise. This may be especially helpful if you trade covered calls or cash-covered puts. Higher option premiums in both cases will improve your returns.
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