September is historically the worst month for the market. Is it time to sell everything, before it's too late?
Happy September.
The FTSE 100 ushered in the first day of autumn with an 89 point or 1.8% fall to 4,820. Leading the way south were banks like Lloyds Banking Group (LSE: LLOY), HSBC (LSE; HSBA) and Royal Bank of Scotland (LSE: RBS), down 4.8%, 4.2% and 3.7% respectively, and resources stocks like Xstrata (LSE: XTA) and Antofagasta (LSE: ANTO), each off a little over 4%.
When it comes to the stock market, the month of September has a bad reputation. In the US, September is the worst month for shares, with the S&P 500 down 1.3% in that month since 1928. It's a similar story here in the UK.
Oh September…Why We Hate You
It was in September last year that Lehman Brothers collapsed, sending world stock markets into a vicious downward spiral. The FTSE 100 lost 13% in September 2008. In 2001, in the wake of the terrorist attacks on New York, the FTSE 100 finished September down over 8%.
So what's up with September? Obviously it was somewhat random the Lehman Brothers collapse and the US terrorist attacks both happened in September. But apparently there is some substance behind this month's historically poor performance.
Here are 3 potential theories...
1. Summer is over and now is the time to get serious about investing. Investors come back from holidays, take a critical look at the data and the numbers, and decide to take some profits off the table.
2. Investors are in a bad mood, knowing summer is over, the holiday season is over, the days are getting shorter, the tubes and trains are packed again, and it's all downhill until the silly season starts in mid December.
3. It's a self-fulfilling prophecy. Because September has historically been a bad month for shares, investors automatically assume it's going to be a bad month every year, and therefore are more likely to sell than to buy.
The Good Old Fashioned Investing Strategy
As for me, this is not a time to sell shares just because it's September. I'm not one for history repeating, otherwise I'd be bunkered down with a good supply of baked beans and bottled water waiting for the next terrorist attack. Or I'd be selling my whole portfolio at the end of August every year in case the market were to plunge 10% in September.
Instead, I tend to follow good old fashioned investing strategies that have served me well over the years, especially in the months of February, August, November, April, January, November, May, July, March, December, June, October and even September.
In a nutshell, my strategy is…
1. Buy good companies when they are trading at cheap prices.
2. Sell companies when they approach fair value.
3. Wash, rinse and repeat.
Forget The Heady Days Of 2007
It should be no secret to regular readers of my gumf that I'm quite bearish about the valuations of some companies. My caution stems from the economy. Although it is in the process of stabilising, and even recovering, I believe the recovery will be a long and drawn out process, not some V-shaped bounce back to the heady days of early 2007.
Simply put, if you're in agreement with central bankers across the world, including the Bank of England's Mervyn King and US Fed Chief Ben Bernanke, that this is the biggest recession since The Great Depression, I can't possibly see how we can bounce out of it in the relative blink of an eye.
After all, even now, with the recession declared over in the US and on its last legs here in the UK, if all was rosy again, why is the base rate still at 0.5% here and virtually zero in the US, and set to stay that way for some time yet?
Learning A Harsh Lesson
Consumers are in a process of voluntary and forced de-leveraging. People are paying off their debt, probably because they have been taught a harsh lesson in the evils of excessive borrowing, and banks are still reluctant to lend, except for the most credit-worthy of consumers.
As if to prove the point, Bank Of England figures released yesterday showed the amount of consumer debt in the economy fell in July for the first time since they started producing this data in 1993. Whilst it's great news that consumers and businesses are paying down their debt, it's not great news for the economy.
The Good News About A Falling Market
Still, for stock market investors, it's not a time for panic. September has not got off to a good start. But let's put this in some perspective. The market has risen around 40% in the last 6 months. It is due some level of pull-back and/or consolidation. It's normal.
Many people may have quickly forgotten what a down market looks like. September may remind them. Such reminders are healthy, as they can put a stop to any threat of irrational exuberance, and they can also give you an opportunity to pick up some quality companies trading at cheap prices. I hope you're prepared.
More on the economy and the markets:
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> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
