Arrival of September traditionally heralds fall in stock market

German elections mean next month won’t be an exception to pattern that can be traced back to 1896

September 2008 will remain long in the mind, not just for the collapse of Lehman Brothers but also because of the crisis in the Irish banking system. Photograph: Mary Altaffer/AP

September 2008 will remain long in the mind, not just for the collapse of Lehman Brothers but also because of the crisis in the Irish banking system. Photograph: Mary Altaffer/AP

Mon, Aug 19, 2013, 16:02

If May is the month to sell your shares and “go away” could September be the month to buy back into the market? And if you haven’t sold yet, should you do so before the arrival of autumn and potentially lower stock prices?

As Proinsias O’Mahony pointed out on these pages last week, global stock markets have typically performed poorly in September, with a consistent negative bias not just in the US, but also across Japan, Germany and the UK.

Indeed, the S&P 500 has posted its worst monthly return in September whether you go back to 1990, 1970, 1945, or 1928, while the Dow Jones Industrial Average has shown a statistically significant negative bias in September, all the way back to 1896.

The reasons for this are varied, ranging from US fund managers closing out of stocks after Labor Day and taking profits from their better performing stocks, to a return to economic interference after a quiet summer.

For Irish investors, September 2008 will remain long in the mind not just for the collapse of Lehman Brothers but also because of the near collapse of the Irish banking system.

While September 2012 escaped the trend, thanks to better-than-expected support from the US Fed which held up US markets, this September may be no different, with upcoming elections in Germany set to reintroduce volatility to the European market, while tapering ahead of September’s Federal Reserve meeting may also subdue the market. And this time around, investors might have more to lose, given the upwards trajectory of markets over the past four years.

So what should you do?
Russ Koesterich, global chief investment strategist with index fund specialist iShares, advocates a “more defensive” approach heading into the autumn.

“I would consider lightening up on parts of the market that look particularly extended year-to-date such as US small caps and US retailers,” he advises, adding that investors might also look to investments that offer the potential for downside protection such as minimum volatility funds, mega-cap funds, and international dividend funds.

For John Looby, equity fund manager with Setanta Asset Management, however, it’s best to ignore the trend and simply put it down to a “statistical curiosity with no practical relevance”.

“We believe that buying a share on the stock market should always be viewed as buying a piece of a business. The purchase should only be made if the price is sufficiently attractive relative to a conservative and credible valuation of the business. No business person would make the decision to sell their business based on a date in the calendar,” he advises.

“For the same reason, no investor should make a decision to buy or sell a share on the stock market based on a date in the calendar,”he adds.

Should you take your profits?
Regardless of seasonal trends however, if you have put money into the markets over the past few years and made a substantial gain on your money, you might be thinking that now could be a good time to take your profits and get out of the markets.

So should you take these profits now rather than wait around to see your investments slide? After all, not so long ago Apple was trading at more than $700 – now it’s down below $500. And if you invested pre-crisis in the Irish market, you’re still going to be sitting on those losses, so the temptation might be to get out now while the going’s good.

Looby, however, is not so sure. Adding the caveat that it’s “impossible to predict the future direction of the stock market”, he says that given the significant rise of the stock market over the last four years, “it is certainly the case that the value generally on offer today cannot be as attractive as it was then.”

However, Setanta continues to be invested in many stocks at “prices which we believe represent attractive long-term value for our clients.”

Ian Quigley, of Investec Wealth and Investment, concedes that you could make the case for taking profits in certain selective stocks, given that they are “no longer particularly cheap” after four years of rising stock prices.

“There could be some argument for doing so given that we might see some rocky months going into a seasonally weak period of the year,” he says, adding that if you were to take your profits now, and if the markets correct in September or October, you’ll likely feel good about your decision.

However, exiting the markets can cause other problems, as he notes that most people tend to wait to re-invest until the markets reach new highs.

The more compelling argument however, is what will you do with your money if you sell out of stocks? After all, keeping your funds on deposit means you might barely keep up with inflation.

And while a little more volatility may enter the markets, Quigley agrees with Looby that equities still represent long-term value.

“We still believe that equity markets are in a cyclical bull market and while there may be periods of weakness ahead, for most investors it makes sense to stay invested in high quality equities,” he says.

This is particularly true for the Irish investors who remain largely invested in cash deposits, “which will likely earn returns below inflation for a protracted period,” he adds.

So if you have stayed out of the markets until now, equities still appear to represent value with potentially weaker prices in September offering a buying opportunity.

Quigley, however, advises those moving into the market to make some geographical distinctions.

“Certain parts of the equity market are starting to look a little expensive, like parts of the US market, and investors may be well served looking to reorientate part of their portfolio to better valued markets in parts of Europe and Japan,” he says.

Investec is also wary of commodity related investments and “expect further weakness in this area”.