The losing season
We are in what is historically the worst period of the year for stock markets. The month of September statistically shows the largest average annual loss. October, surprisingly, is marginally profitable on average but when things go wrong it can get ugly.
Dave Paterson, who is the editor and publisher of the Mutual Funds Update newsletter, has drawn on figures from Yahoo Finance to compile a table summarizing the performance of the S&P 500 from January 1950 to July 2012. It’s an eye-opener.
It shows that over those 62-1/2 years, the S&P lost an average of 0.57 per cent in September. Only three other months were losers: February at -0.12 per cent, August at -0.04 per cent, and June at -0.02 per cent. Moreover, the best September return was only 8.76 per cent.
Interestingly, October showed the best one-month return over that time at 16.3 per cent. It also showed the worst one-month loss by far, 21.76 per cent. The obvious conclusion is that October is often highly volatile and anything can happen.
The best time to be in the markets is November-December and again in April.
So what do all these numbers tell us in terms of an investing strategy for the next couple of months? Obviously we have to be careful when it comes to averages – don’t forget the old story about the man who drowned in a river that averaged only one foot in depth when he stepped into a hole.
Nonetheless, this is a time when experience tells us to exercise caution. September and October have histories of producing violent market upheavals. The Crash of 1929 took place in October. So did Black Monday, the Oct. 19, 1987 plunge that took down markets around the world. A decade later, the Asian crisis triggered what was then the biggest one-day drop in the history of the Dow on Oct. 27, 1997.
The terrorist attacks of Sept. 11, 2001 sent markets reeling just as they were starting to recover from the high-tech plunge. Then in September 2008, Lehman Brothers collapsed setting off a chain reaction that almost brought down the global financial system.
Instead of “sell in May and go away” a more appropriate adage might be “sell before Labour Day, buy after All Saints Day”.
Of course, we could be pleasantly surprised. So far, September is off to a good start. The S&P/TSX Composite Index was up 3.4 per cent for the first week while the S&P 500 added 2.6 per cent. But it’s still early.
There are so many cross-currents right now that it is hard to predict what is going to happen in the short term. In its policy statement last week, the Bank of Canada cited widespread slowing of economic activity, the recession and financial crisis in Europe, and the sluggish U.S. recovery as reasons for holding its 1 per cent target rate, even though Governor Mark Carney would dearly like to raise it.
Added to that was the election of a minority Parti Quebecois government in Quebec. The markets appeared to shrug it off but some businesses may be reluctant to make new investments in the province. The reason is not so much the threat of separatism (which is almost non-existent right now) but rather the uncertainty created by the PQ’s promise to raise taxes on the “rich” and certain types of corporations, such as mines. Those aren’t the kind of policies that attract new money.
On the positive side, U.S. auto sales were strong again in August, housing prices in that country are finally starting to edge higher, business investment in Canada as a whole remains “solid” (the Bank of Canada’s description), and second-quarter financial results from S&P companies came in stronger than expected.
In such a shifting sands scenario, markets are likely to overreact to news, good or bad. An announcement from the U.S. Federal Reserve Board that it will implement a third round of quantitative easing (QE3) would likely send stocks soaring, even though the underlying implication would be that the U.S. economy is weakening. Conversely, if third-quarter financial results, which will start coming out in early October, are unusually weak it could spark a major sell-off.
The best advice I can offer in these circumstances is to avoid being swept up in day-to-day frenzies and have some cash available for buying opportunities. If we see a pronounced pull-back in the next two months, be ready to take positions at the start of November (or after the U.S. election if you want to be ultra-cautious). There are some good values in the market right now but they may look even better in eight weeks.
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