September's reputation for a lousy stock market might be misplaced

Published Wed, Aug 31 20228:57 AM EDTUpdated Wed, Aug 31 20229:14 AM EDT

The August-September period is the worst three month period for the markets, and September has the distinction of standing as the worst month for the S & P 500. In fact, it's the only month that has a negative average total return, going back to 1950, according to the Stock Trader's Almanac. S & P 500: worst months (average total return since 1950) September -0.5% February flat August flat June +0.1% May +0.2% October +0.8% Source: Stock Trader's Almanac The only good news: September is followed by October, which is better, but November-January is generally the best consecutive three month period of the year. S & P 500: best months (average total return since 1950) April +1.7% November +1.7% December +1.7% July +1.1% January +1.1% March +1.0% Source: Stock Trader's Almanac But is September really that bad? The data above goes back to 1950, but here's something curious. If you just go back 15 years, the pattern is very different. S & P 500: worst months (average total return since 2006) June -5.5% May -0.7% January -0.5% February +1.0% August +2.1% September +3.3% Source: Stock Trader's Almanac If you look back at only 15 years, September ranks as only the sixth-worst month. Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac, cited "anticipators," shifts in cultural behavior and faster information flow as factors in September's recent improved performance. Anticipators? Jeff means front runners, "Folks selling ahead of September seasonal weakness causing declines in August, for example," he wrote to me in an email. Another reason September has been an up month in the last 15 years: the bull market. "But that doesn't mean September is a walk in the park," he told me. "It still sits at the volatile and dangerous juncture of Q3/Q4 with the mutual fund reporting requirements causing many of them to finalize transactions by the end of September or October. Hence September is the worst month and the phenomenon of Octoberphobia. This creates end of Q3 window dressing and portfolio reshuffling. So September performance may have improved over the past 15 years but it is still a seasonally weak period." One final point: the course of September depends a lot on how we enter it. "September performance has historically been skewed to the downside when beginning the month in a downtrend (as is the case today) vs. skewed to the upside when starting the month in an uptrend," Chris Verrone at Strategas said in a note to clients. "It's not easy hitting behind in the count." It's going to take a lot more than negative or positive seasonal patterns to move stocks out of their funk. For the moment, the mood has returned to pessimism. Typical is Michael Strobaek, Credit Suisse's global chief investment officer. "Market participants are now confronted with an environment of slowing growth, rising probability of recession, elevated inflation and — after the Jackson Hole Symposium — central banks that are determined to hike interest rates, and stay the course," he wrote in a recent note to clients. As always, there are people looking to make money. It's been widely noted that short-term momentum indicators (Relative Strength Indicator, or RSI) has gone from overbought (bearish) to nearly oversold (trending bullish) in just two weeks. That's the "faster information flow" that Hirsch is talking about. Surveying the damage, one old-time trader who still commits a large amount of his own money to the market every day told me: "I'm getting more bullish. I know hedge funds down 30% this year. When you are down 30%, you have to take a risk and commit. You are forced into the market. When you're down 30%, if you lose more, nobody cares."