Hinsdale’s investment snapshot: Which month is the worst for stock investing?

investment snapshot
John P. Maguire of Rationalis Capital Management in Hinsdale | Submitted

We’ve started a new investment feature designed to give you some background on current market trends. Our eighth piece looks at why certain months tend to do worse for investors than others. The answer may surprise you.

Most investors remember that “Black Monday” refers to Monday, Oct. 19, 1987 when the Dow Jones Industrial Index had its largest one-day percentage decline in history falling over 22.5 percent. Prior to this the largest percentage decline also occurred in October on Oct. 28, 1929 which also earned the moniker “Black” although the day was different so it became known as “Black Tuesday.” Given these two infamous declines one might be tempted to say October if asked to name the worst month for the stock market. Most people would probably reiterate October when they learn that 6 out of the top 11 worst performing days occurred in October. But they would be wrong.

Most people are surprised to learn that September is historically the worst month for the stock market. Since 1929 the Dow Jones has fallen on average 1.4 percent in September. It is the only month where the market declines more than 50 percent of the time. All other months have positive performance over 60 percent of the time. And this decline is not just limited to the narrow Dow Jones. The broader market as measured by the Standard and Poor’s 500 also performs its worst in September. Since 1929 the S&P 500 has declined an average of 1.3 percent in September.

There are plenty of theories for this performance, or actually, negative performance.

Some people believe that investment managers refrain from major selling during the summer months due to the light volume in trading as a result of summer vacations. Returning after Labor Day, many investors look to improve their performance by selling underperforming securities from their portfolios.

Another reason is that many mutual fund companies end their fiscal years in September and mutual fund managers, on average, like to sell their “losers” before their fiscal year-end.

Finally, whether or not you believe in historical stock market seasonal patterns, institutional investors cannot ignore the significant underperformance in September so they find it difficult to add to their allocations in equities until late September and early October when historical averages are working in their favor.

What should we take away from this as investors?

We should simply be prepared for downside volatility and remember that fear is an investor’s worst enemy. Individuals tend to sell when they should be buying and buy when they should be selling. If September lives up to its historical norm and the markets sell-off then investors should be prepared to buy and they should fight their natural tendency to sell during the worst market declines. 

Disclaimer: The information contained in this article is not a solicitation to sell securities or investment advisory services where such an offer would not be legal. Information included in this statement regarding market or other financial information is obtained from sources believed to be reliable. Past performance is never a guarantee of future performance.

John Maguire has been an Investment Advisor for more than 30 years. He is a Managing Partner of Hinsdale-based Rationalis Capital Management, LLC, online at www.rationaliscapital.com. He can be reached at john@rationaliscapital.com or by calling 630-654-8382.

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