Many investors will no doubt be pleased to see the end of September. Historically the worst month for stock markets, this September was no exception. In this article we’ll look at this historical seasonality in the stock market and whether important investment implications can be derived from it.
The S&P 500 and the Nasdaq finished the month down 4.5% and 5.1% respectively, while the FTSE 100 managed to register a 2.3% gain (as at 28th September). Some of this volatility can be attributed to the “higher for longer” rhetoric coming out of both the Federal Reserve (Fed) and the Bank of England (BoE) last week, indicating interest rates will remain elevated for longer than anticipated.
Central bank rhetoric aside, September is traditionally a rocky month for stock markets. The S&P and Nasdaq have both posted negative returns in the last four consecutive Septembers, while the FTSE has been in the red in three of the last four. Since 1950, the S&P 500, Nasdaq and FTSE 100 averaged flat returns in September.
Some say portfolio changes made to cash in at the end of summer are a primary reason stock markets are hit in September. In the US, many mutual funds end their fiscal year in September, and tend to sell losing positions before the year-end, which may weigh on markets.
All this said, it’s worth noting that October has its own history of volatility, with stock market crashes more likely to occur in October than any other month. Below is a list of some of the more well-known stock market crashes…
The Bank Panic of 1907
A series of bad banking decisions caused public distrust in the banking system and led to a number of bank runs. JP Morgan and other wealthy Wall Street bankers lent their own funds to save the country from a severe financial crisis.
The Stock Market Crash of 1929
The crash of 1929 ended a period of the roaring 20s when share prices rose to unprecedented levels. The crash – which saw the Dow lose nearly 25% in just two days – wiped half the value of the Dow by mid-November.
Black Monday 1987
Globalisation and financial contagion led to a market crash domino effect that rippled across the world. Central bank intervention meant severe losses were rapidly stopped, but the interconnectedness of global markets and the speed of the crash acted as an alarming wake-up call for the industry.
These extreme events aside, overall, October appears to more mixed for markets. The S&P and Nasdaq posted positive performance in three of the last five Octobers, while the FTSE registered two positive Octobers in five years. Since 1950, the S&P 500 was flat in October, while the Nasdaq and FTSE were slightly negative.
However, it is worth noting that stock market corrections lead to buying opportunities for investors keen to take advantage of the dips. Indeed, Black Monday 1987 turned into one of the best buying opportunities in the last 50 years.
It is also worth keeping in mind that stocks often experience a recovery in the fourth quarter, and history tells us that there is every reason to be optimistic from now until the end of the year. US stocks typically post their best returns in the fourth quarter - since 1957, the S&P has averaged 4% gains in the final three months of the year. Another interesting fact is that in years when returns for the first three quarters are similar to what we have seen in 2023, markets, more often than not, tend to post positive returns in the final quarter.
Sometimes too much attention is placed on historical seasonality and trying to derive investment implications from it. Our approach of buying high quality businesses that respond robustly to a range of economic conditions - regardless of which month it is - drive risk adjusted returns over the long term. This, in our view, is the most prudent way forward.
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