Exactly one year ago, worries about the economy were giving way to cautious optimism.
The stock market had bounced back from a mid-summer funk. Newspaper stories were touting “bargain” stocks such as Washington Mutual. In his weekly radio address, then-President George W. Bush had just told the nation hopefully about “recent signs that our economy is beginning to improve.”
Then came September, and wham.
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The failure of Lehman Brothers was the catalyst, turning a recession into a crisis. The credit markets froze, and stock prices went into a frightening free fall.
A year later, Washington Mutual languishes in bankruptcy, a Chicago Democrat is delivering the White House radio addresses, and the stock market once again has bounced back from a funk.
But don’t look now, it’s almost September again.
In stock market lore, September holds the worst reputation of any month by far.
Go back 20 years, 50 years or even a century, and the ninth month is consistently the weakest. Over the past 100 years, September stock prices have declined by an average of nearly one percentage point, according to an analysis by the Bespoke Investment Group. All the other months have tallied gains, except February, which is down only slightly over that same historical period.
Why September? Maybe because public companies tend to back off financial targets for the second half of the year. Or maybe because investors returning from vacations take a hard look at their portfolios.
“Summer’s over,” noted Paul Hickey, Bespoke’s co-founder. “You’re heading into winter.”
So obviously it’s time to sell, right? “If only it were that easy,” Hickey said.
Professional investors generally scoff at the idea of trading based on seasonal trends. Consider the old market adage “Sell in May and go away,” which alludes to the relatively weak stock returns during past summers. Anyone taking that advice this year “missed a pretty big rally,” said Douglas Nardi of Legg Mason Investment Counsel in Chicago. “It’s very difficult to trade on seasonal trends.”
At Morningstar Inc., Pat Dorsey compares investing based on the calendar to divining the future through animal sacrifice: “Not much better than chicken guts.”
Even so, selling may not be the worst idea this September. The market’s nearly 50 percent gain since March has come as a big surprise, given the depth of the recession, said Dorsey, Morningstar’s director of equity research.
“The market shot from deeply undervalued to fairly valued quite quickly. It’s almost as if the market is expecting that because we had a deep recession, we’ll have a strong comeback,” he said.
That’s not likely given this downturn’s underpinnings in a credit bubble, he said. “It takes time to pay down debt.”
Far from Wall Street, in a suburb of Green Bay, investment adviser Max Frost gave some bold advice on this day a year ago.
In a column for his local newspaper, Frost took note of September’s cursed history. Given the unwillingness of banks to lend money, he warned at the time, “Houses won’t be built, businesses won’t expand, consumer goods will not be purchased.”
His conclusion: Sell. “If you’re not shorting this market, at least put some of it in cash. You can always buy it back.”
Today, Frost remains pessimistic, especially after stock prices kept climbing over the past few months.
“This market has gone up like a bad moonshot, without enough money to get to the moon,” he said in an interview last week. “Everything’s gotten too highly valued.”
It is, after all, almost September, Frost observed: Look out below.
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