Why has September historically been such a weak month? Surely a statistic that shows September being down on average 1% since the 1890s is dispositive of the action, no?
Let's start by asking ourselves whether 1% is a big deal. The answer, of course, is no. The bigger issue is that there is propensity for the month to be negative.
I've got a couple of reasons. Admittedly they are subjective, but the down 1% number is subjective in its own way, meaning I just don't regard it as material enough to warrant the fear that it seems to generate. And let's never forget this is all part of what I call "day-book" story-telling, meaning that at the beginning of a month we tend to focus on these things because they pop up in almanacs and they are "something to say" because, unless it is a huge news day, we are always looking for something to say.
First answer: tech. Because of the way the calendar works, many employees in various countries do not put in the full amount of time in the months of July and August. This is called "seasonality" and it is almost always underestimated on Wall Street, particularly when it comes to technology. Put simply, there's not as much business being done. In September we find that out to be the case.
But there's two things in play here. First, the stocks tend not to reflect that. They reflect the absence of data points which, in a year like this one, presumes some sort of positive, not negative, bias. There is a belief in tech right now that a combination of the internet of things convergence with social, mobile, cloud and video that there is a huge amount of business going on. So the stocks run into the month, enjoying a summer rally.
But because of that vacation factor, the actual facts on the ground do not support what the stock have done in the summer months. Or, to put it another way, we've gone up on a vacuum and we discover, typically through preannouncements that occur in the first week, that estimates are too high. I think the that talk about takeovers and the broader themes I just traced have created a false sense of across-the-board optimism that is not commensurate with reality.
So expect shortfalls, and shortfalls breed lower prices.
Second, there is a real, palpable fear of October that overtakes the last week of the trading in the month. That's because, on average, October's been a good month. But we have had some serious dislocations and crashes in October, a fact that really strikes fear into the heart of investors. So we have a disproportionate fear of a big bad event that may or may not be lurking that is worth selling ahead of, given that the wounds are far more stark than they are coming into September, which seems like it would be a benign month owing to a very light earnings calendar.
Finally, the A-team players come back at the big hedge and mutual funds after what can be a fruitful summer. You can look at your book, how you have done, where you are vs. the averages, and if you are up nicely, you want to lock it in. We used to call September "lock it in" month, because if we were this close and up nicely, no partner would ever second-guess us for raising cash. If we were up nicely, we sold winner. This is a pattern that is ingrained in many. So you have winning funds selling winners, which then produces the downward bias the aggregate numbers show.
So, tech shortfalls and preannouncements, actual fears of October and the lock-in factor are deeply ingrained. These are, to me, what explains historic weakness. Keep them in mind when we turn the calendar page. They won't be mentioned with the stats. They should be.