Back in the beginning of May, I talked about an investment phenomenon that showed selling your stock holdings in May and then buying them back in November yielded better returns than just holding them through those months. Part of the reason is due to investors selling to go on vacation. They don’t want to stress about losing money while on a trip so they liquidate. As it turns out, this would have been a smart decision for this summer as in May alone the S&P 500 lost more than 8% of its value. Up until Friday, August 6 it was still down almost 6%.
But the selling in May doesn’t say to buy back in August, it says to wait until November. That’s because the first months of fall have their own issues. These issues are entirely different, but perhaps more interesting. The months of September and October are littered with historical financial catastrophes. It was in September of 2008 that Lehman Brothers failed, igniting that already smoking financial crisis. Both months had tough years in 2001 (9/11) and 2002 (post tech bubble bottoming out). But there was a mini crisis in 1998 that started in late August and ran to November. The crash of 1929 and 1987 were both in October. The worst single month of the Depression was September 1931. And that’s not even everything.
This is hardly a regular thing, but on average these months do offer lower returns (see link above). Theories abound for why these months are so bad. Everything from stock analysts getting nervous about year-end results to mutual fund managers having to sell of holdings for the end of their quarter.
I’d love to have the time and resources to do a full month by month breakdown, but I just don’t have it. So instead I’ll speculate. These movements are clearly based on fear. Fear of bad earnings, fear of losing value while on vacation, fear of something. This is a self-fulfilling prophecy because the more people like me talk about it the more likely it is to happen. But that doesn’t answer the question of why it’s happening. I’d love to see how it compares in election years. We surely have investors scared that a new Congress or President will be bad for business. The uncertainty is over shortly after Halloween so people will come back to the market once they know who is calling the shots. Perhaps another possibility is people getting back into the market in time for the Christmas earnings season where people start to feel better about the company earnings.
For you and me none of this really matters. This is a game of market timing, that can work, but probably isn’t worth it. You also don’t want to miss out on a great run that actually does happen. And since you invest at regular intervals you’re able to get in some investments at those lower prices over the summer anyway. But phenomenons are fun to talk about, and just as I said back in May, if an mutual fund manager came to me with this strategy I’d probably devote a small portion of my portfolio to it.
Photo: sjsharktank
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
