October Is Not the Cruelest Month
By Mark Riepe, CFA, Vice President and Manager of the Schwab Center for Investment Research.
What's the worst month for stocks? A lot of investors — myself included — would guess October. After all, October has seen two infamous market crashes, in 1929 and 1987, as well as substantial drops in 1989 and 1990.
October's ghosts and goblins may get the most media attention, but statistics show that October is not the cruelest month for investors — that would be September. Based on historical information dating back to 1926, September has averaged total returns of
-0.6 percent, with double-digit losses in 1930, 1931, 1937 and 1974. October (admittedly, the second-worst performing month) at least delivered positive returns over the same 73-year period, with average gains of 0.3 percent.
Average total monthly returns of the S&P 500® from 1926 to 1998
Jan 1.7%
Feb 0.7%
Mar 0.4%
Apr 1.4%
May 0.6%
Jun 1.3%
Jul 2.1%
Aug 1.6%
Sep -0.6%
Oct 0.3%
Nov 1.5%
Dec 1.7%
Source: Schwab Center for Investment Research
In recent years, October has fared much better. During the 1990s, October ranks as the eighth best month with an average return of 1.4 percent — better than March (0.6 percent), April (1.2 percent), June (0.3 percent) and August (-2.1 percent) combined.
Seasonal skeptic
I tend to be skeptical when it comes to trading based solely on the calendar (see my column Summer Rallies: Fact or Folklore?). Other than the January Effect, in which stocks, particularly those of smaller companies, tend to do well, seasonal effects seem to be more random than rational.
Of course, that hasn't stopped people from creating theories to support seasonal investing. *Most revolve around the notion that the past is destined to repeat itself. (my edit) As someone who deals with numbers on a daily basis, I know how easy it is to design strategies that do well based on historical information. Whether that success will continue in the future is far more difficult to predict — and even harder to take advantage of.
schwabon.com
* The contrarian stance, which seems to be gaining some acceptance, is that this could be a good month, regardless of the similarities to last year. As is often the case, the market seems do do exactly the opposite of what everyone expects.
Regards,
JM |
