September and October aren’t only the worst months for hurricanes. They’re also bad for the stock markets.

According to data compiled by the Yardeni Research, a U.S. company whose reports are widely used by financial professionals, over the years from 1928 to 2016 the S&P 500 lost an average of 1.1 per cent in September. No other month even comes close; in fact May was the only other in negative territory and that by a mere 0.1 per cent.

October is actually on the plus side, with an average gain of 0.5 per cent. But that figure conceals the fact that some of the worst collapses in history occurred during that month. They include the panic of 1907 and the crash of 1929, which ushered in the Great Depression. Another October debacle was Black Monday in 1987, which hit markets around the world. As well, there was the Friday the 13th mini-crash of 1989.

No wonder investors worry about October, especially now with stock market valuations so high.

Why are September/October such rough months? A number of theories have been put forward over the years, none of which are totally convincing.

A few years ago, a professor at MIT suggested the root of the problem was summer holidays. Lily Fang and her colleagues did research that indicated when people went off on vacation they paid less attention to what was going on in the world and the possible impact on stocks. When they came back to work after Labour Day, all those problems were suddenly magnified, alarm set in, and sell orders followed.

A variation of this theory is that trading volumes are historically very light during the summer. When people return from holidays in September, they sell off positions they were planning to exit anyway, ratcheting up volume and putting downward pressure on the markets.

Innate investor fear of September/October has also been blamed. People are nervous about these months to begin with. The slightest hint of bad news, which might be ignored in March, can push investors into panic selling that quickly spreads and triggers automated sell orders.


    Mutual funds also get some of the blame. Many U.S. mutual funds have a September year-end and managers typically sell their losing positions before then. That can trigger an imbalance of sell orders that can drive down market prices.

    The answer is that no one really knows why autumn is so bad for the markets. It’s an historical phenomenon with no plausible explanation.

    So, if you are a stock market investor what should you do about it? You could sell everything and wait for November, of course.

    But that could be counter-productive. The markets don’t always cave in the fall. Yardeni Research found that, although the S&P 500 was down in 49 of the 88 Septembers since 1928, it was up 39 times. The October results were even better, with 52 up years against 37 downers.

    Plus, if you sell everything you face an agonizing decision of when to go back in. Some people who exited the markets back in 2008 are still sitting on the sidelines, having missed one of the strongest bull runs in history.


      A better plan if you’re worried is to reduce stock market exposure by taking some profits and building your cash and fixed income positions. That won’t completely insulate you from a market collapse but it will soften the blow.

      You might also take a look at the Horizons Seasonal Rotation ETF, which trades on the Toronto Exchange under the symbol HAC. Its objective is to smooth out the monthly imbalances in market performance by investing in stocks that are stronger in certain periods and adjusting the asset mix during times that normally experience seasonal trends.

      For example, right now the portfolio is heavily weighted towards fixed income and cash. Almost 58 per cent is in bonds or bond funds, with 26 per cent in cash. Another 12.7 per cent is in gold-related securities, so this is a very defensive fund at this time.

      If the stock market does go into the dumps in the next few weeks, investors in this fund won’t feel more than a blip.

      Get more business in your inbox
      Sign Up Now

      This ETF has been around since 2009 so we have some good history to work with. The average annual compound rate of return since inception is 8.35 per cent and, most important in view of the fund’s mandate, it has never had a losing calendar year. The management fee is 0.75 per cent plus tax.

      Finally, if you’re nervous about the market you might consider this famous quote from Mark Twain: “October: This is one of the peculiarly dangerous months to speculate in stocks. The other are July, January, September, April, November, May, March, June, December, August, and February.”
