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The "September effect" and investing at different points of the year

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  • The "September effect" and investing at different points of the year

    For those unfamiliar with the term, it refers to the historical fact that September is the worst month of the year for the stock market and one of the few months of the year that over many decades of data the S&P 500 has a negative return.

    For those interested, here are the average returns for each month of the year from 1950 - 2016:

    January:  0.79%

    February:  -0.05%

    March: 1.14%

    April:  1.34%

    May:  0.15%

    June:  -0.09%

    July:  0.88%

    August:  -0.27%

    September:  -0.67%

    October:  0.76%

    November:  1.38%

    December:  1.54%

    Source:  http://www.moneychimp.com/features/monthly_returns.htm

    I've never relied on this data to decide what to invest in at a certain time of the year.  But if you believe the future is likely to emulate the past, you could justify doing any of the following:

    - holding assets in cash from August 1st to October 1st, then buying stocks.

    - Buying most aggressive assets every year starting October 1st (like SCV stocks), then dialing it back throughout the year until you get to your bonds in the summer and early fall, then jumping back into aggressive stocks again on October 1st.

    - If you're really comfortable with risk, shorting the S&P 500 in August and September.

    As I mentioned, I haven't done any of these things.  I am down a little bit in bonds at the moment and have been adding them back recently, but when I see data like this, I wonder if continuing to buy them from October - April is a suboptimal strategy.

     

    Basically, I'm wondering if others think this effect is likely to continue, and why or why not.  If so, it would seem like an exploitable inefficiency (despite the wide stdev in averages), and intuitively it doesn't make sense why it would persist when other phenomena like the "January effect" for small caps would get eroded away.

  • #2
    If this was a viable strategy everyone would do it, and the strategy would be lost.  It's like the parable about the economist walking with a student.  Student says "hey, look there's a dollar on the ground".  Economist, without looking, says "No there isn't.  If there was someone would have picked it up already."

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    • #3
      I think when you do every year ever this holds, however it has not held in the most recent past IIRC and of course with all things market based since the most recent past is the most like today, its a better model. It hasnt been the worst month in the 2000-2009 decade (february) and though I couldnt find the evidence, I swear I have read it, but will continue to look.

      Also, the most important thing is what happened in August, all the bad septembers were usually preceded by not great Augusts. That was not the case this year. As usual, no one knows for sure.

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      • #4
        What about the January effect, the Santa Clause Rally, Buy on the rumor sell on the news, the briefcase indicator etc.  Any more?

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        • #5




          What about the January effect, the Santa Clause Rally, Buy on the rumor sell on the news, the briefcase indicator etc.  Any more?
          Click to expand...


          http://www.businessinsider.com/bizarre-economic-indicators-2012-8?op=1/#rine-advertisement-intensity-index-17

           

          I had a statistics professor in grad school who liked to say something along the lines of "statistics don't lie, but I can get them to tell me anything I want."  It seems as though the same holds true for indicators and effects.

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          • #6


            What about the January effect, the Santa Clause Rally, Buy on the rumor sell on the news, the briefcase indicator etc. Any more?
            Click to expand...


            Sell in May and go away.

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            • #7







              What about the January effect, the Santa Clause Rally, Buy on the rumor sell on the news, the briefcase indicator etc. Any more?
              Click to expand…


              Sell in May and go away.
              Click to expand...


              Except if you believe the numbers above, May 1st - October 1st is pretty much a wash.  You would just lose in transaction costs, and in a taxable account, capital gains.  I always thought the other part of that was to buy on Halloween, but October alone is enough to overcome the doldrums of the summer.

              I wonder why it's not called sell in August and dodge the bust.

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              • #8
                S&P was up 1.9% in September for those keeping score at home.

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                • #9
                  Dogs of the Dow!
                  Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                  • #10
                    Again, while its important to look at the whole series for context, you have to look at the most recent past first since its most likely to represent today. Lots of these "effects" dont hold after that. Also, you have to recognize these are simply odds, and in order to benefit from them you'd have to accept they exist, will exist in the future, and the benefit outweighs frictions. Then, you'd have to implement a sufficient number of times to capture the edge because it will not occur every time. That last part is hard even if it turns out theres positive expectancy.

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                    • #11
                      I wasn't going to look at every month, but the average September is slightly negative for the last ten years and for the last twenty years.

                      2008 (-9.56%) and 2002 (-11.00%) sink the averages.

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                      • #12
                        Many of these seasonality correlations have been mentioned in the lay financial press and by others in this thread. The question is why does such a seasonality bias occur. Is it because there's actually something that explains it in balance and supply and demand during various months of the year, or is it just a statistical anomaly?

                        -WSP

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                        • #13
                          Give me any set of retrospective data and I can find a probably meaningless "pattern" that is just statistical noise.

                          What makes you think there is some underlying cause of this pattern that you've pointed out?

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                          • #14
                            I would like to say every back-tested portfolio I have ever seen has been successful.  

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                            • #15
                              Do you think it’s meaningless that we see more depression in the winter? Or that the most babies are born in August almost every year?

                              I don’t know the standard deviation or p values of those numbers above, but for 67 years, they can’t be that large. We may not know what produces those discrepancies, but that doesn’t mean it’s all chance.

                              But yeah, it’s purely retrospective and thus hard to count on going forward. Especially when we don’t really understand why it exists.

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