Another September Slump on the Way?

Stocks have shown a tendency to retreat during the month, and S&P has identified a number of potential reasons for the weakness

by Sam Stovall From Standard & Poor's Equity Research

September has always been a problem for equity investors. It's the only month in which the Standard & Poor's 500-stock index has averaged a decline from 1990 to the present, 1970 to the present, 1945 to the present, and 1929 to the present. In each of these periods, the S&P declined in September more than half the time.

Why the tendency toward a September slump? We believe the reasons could be as follows: 1) Investors returning from vacation see their portfolios in shambles, which results in further carnage; 2) a lack of capital inflows, as bonuses, tax refunds, and pension/IRA contributions already have largely taken place; 3) analysts reducing their full-year earnings estimates and target prices, as there is little time left in the year to make up projected shortfalls; 4) companies typically start the budgeting process after Labor Day, possibly dampening the mood of managers who communicate with investors; and finally, 5) mutual funds with October fiscal yearends may begin selling losing stocks.

Since 1990 (the date to which S&P 500 sector index data extends), the S&P 500 fell an average 0.8% and posted monthly declines 53% of the time. Also interesting is that six of the 500's 10 sectors recorded negative average price changes in September, as well as frequencies of decline.

Source: Standard & Poor's Equity Research

Of course, there is no guarantee that the market will tumble this time around. S&P believes the recent pullback in the S&P 500 from its July highs has probably gone as far as it will, even though another retest of the 1370 intraday low and 1406 closing levels may occur.

Four Categories of Sell-Offs

I mention these seasonal weaknesses not in an attempt to fan investors' fears but to alert them to these patterns, and to suggest they not react hastily and do harm to their portfolio's longer-term potential return. If fear and greed dominate the near-term trading actions of many, I believe that a more complete understanding of stock price movements may serve as virtual Valium by calming jittery nerves enough to stop investors from becoming their own worst enemies.