September Is Still Just a Month

Here we go again! September has arrived, and with it, warnings to buckle your seatbelt because, historically, September stinks. And yes, it's true, poor September does boast the lowest average S&P 500 return of any month, and some Septembers have been truly awful. It's easy to see how September gained notoriety as the start of the legendary "financial hurricane season." But it doesn't deserve the bum rap. Bad Septembers are a freakish coincidence. We've seen plenty of fine Septembers, too, but these don't win headlines. September isn't special, for good or ill.^[i] It is just a month, and not automatically bad for stocks.

True, since 1926, the S&P 500's average September return is -0.7%, and September is the only month with a negative average return.^[ii] But here is your first clue that the average is skewed by a couple outliers: The median return is 0.1%.^[iii] Positive. Within spitting distance of zero, but positive, which tells you we've had more good Septembers than bad, even if just barely.

Exhibit 1 shows the distribution of September returns over the last 90 years. Unsurprisingly, it's pretty darned bell curvy. More Septembers qualify as "modestly positive" than any other return bracket. There are more really bad Septembers than really good Septembers, but most of these abysmal Septembers occurred during pre-existing bear markets, not out of the blue. Only one bear market-the 1929-1932 bloodbath-began in September, and it wasn't because the calendar turned.

Exhibit 1: Septembers to Remember

Source: Global Financial Data, Inc., as of 9/8/2016. S&P 500 Total Return Index percentage change in September, 1926 - 2015. Shaded boxes indicate negative Septembers that occurred during pre-existing bear markets.

Not to cherry-pick or anything, but if you get rid of just those four awful 1930s Septembers, the average return flips positive, to 0.1%, and the median rises to 0.3%.^[iv] That isn't any more predictive than the average of all Septembers, but it does show how a few bad apples can skew an average, if you'll pardon the mixed metaphor. Averages and medians are handy, but they obscure extremes. Always take the time to explore what underlies any average.

September's frequency of positive returns is 51.1%, which is below the average frequency of positive monthly returns and more or less rounds to "coin flip." But a 50/50 chance of being negative is also a 50/50 chance of being positive. That isn't a very convincing probability to support avoiding stocks in September. It's even less convincing if you consider that markets are efficient and price in all widely known information, opinions and malarkey, including seasonal adages like "September is the worst month," "Sell in May" and the one about the jolly guy in a red suit who comes down your chimney every December. If they actually worked repeatedly, they'd get priced quickly as everyone tried to front run them-and then they wouldn't work anymore. None of these seasonal patterns are actionable.

If you let seasonal myths influence your investment decisions, you'll be forever chasing your tail: Sell in May and go away, but make sure you get back in time for July (the best month), then go away again until St. Leger Day, or not because September is the worst month, and financial hurricane season extends into October, so maybe wait till November. Don't miss the Santa rally, but look out because if January's first day, week, 10 days or entirety stinks, the next year will be bad. If you got dizzy and tired reading those sentences, well, that's the point. This is all a bunch of gobbledygook. Gobbledygook that racks up transaction costs and opportunity cost if you try to act on it.

Do yourself and your portfolio a favor, and think longer term. If you're disciplined, no one month will make or break your returns. Heck, of the 44 negative Septembers on record, 28 were followed by a positive October. Corrections always end. Bear markets always turn to bull markets. Over time, stocks rise far more often than not, carrying investors toward their long-term goals. We aren't going to go all buy-and-hold on you-if you're darned sure a bear market is forming, you've identified fundamental causes that few or no others see and you strongly believe more downside lies ahead of you than behind you, then exiting stocks can be wise. But during a bull market-and we're in a bull market today-it's best to overlook the wiggles and stay cool.