Navigating the Two Worst Months for Stocks
Calendar effect: Why September has the worst returns, and October the most volatility and market plummets.
Art by Andrew Haener
The stock market is smack in the middle of its most treacherous spell: September and October. September is historically the worst performing month. October is the most volatile and has harbored the most crashes.
Why should this be? Good old market psychology. In September, people return from summer vacations, the kids are back in school (pre-pandemic, of course), and year-end draws nigh. October is the spillover month, when investors really focus on any problems that have developed.
That makes it a good time “to harvest losses,” preparing for the new year, said Chad Oviatt, director of investments at Huntington Private Bank. In October, he said, people get their investment statements for the third quarter. That’s another impetus for them “to take action,” he observed.
In other words, these two months are happy hunting grounds for short sellers. While there is no evidence that shorts target these two months significantly more than any other, September and October do promise their fair share of unpleasantness.
The so-called “calendar effect” is controversial. Some students of the market term it merely anecdotal. As no less than Mark Twain described the matter: “October, this is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
But, statistically, the generalization of a bottom-rung September and a volatile October hold up, according to tabulations by Sam Stovall, CFRA’s chief investment strategist. Since World War II, September has been hands-down the worst performer, averaging a loss of 0.6%. The next worst is February, falling 0.01%, the only other negative month on average. In returns terms, October is in the middle, at sixth best.
September Has the Worst Stock Returns Since World War II …
Price performance average percent change from 1945 through September 23, 2020
1.63
1.47
1.42
1.06
1.06
0.92
0.88
0.11
0.22
0.19
-0.01
-0.60
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1.63
1.47
1.42
1.06
1.06
0.92
0.88
0.11
0.22
0.19
-0.01
-0.60
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1.63
1.47
1.42
1.06
1.06
0.92
0.88
0.11
0.22
0.19
-0.01
-0.60
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1.63
1.47
1.42
1.06
1.06
0.92
0.88
0.11
0.22
0.19
-0.01
-0.60
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
... But October Is the Most Volatile Month
Volatility as measured by standard deviation from 1945 through September 23, 2020
18.8
16.9
15.3
15.3
14.9
13.9
13.6
13.4
12.9
12.8
12.0
11.2
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
18.8
16.9
15.3
15.3
14.9
13.9
13.6
13.4
12.9
12.8
12.0
11.2
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
18.8
16.9
15.3
15.3
14.9
13.9
13.6
13.4
12.9
12.8
12.0
11.2
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
18.8
16.9
15.3
15.3
14.9
13.9
13.6
13.4
12.9
12.8
12.0
11.2
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: CFRA
Still, in October, stock prices jump around the most, and that’s sometimes for good, sometimes for ill. Measured by standard deviation, the 10th month has by far the wildest volatility, with a reading of 18.8.
And boy, does it ever know how to take a dive. A bank panic set off a market crash in October 1907. In October 1929 came the horrendous market plunge that set the stage for the Great Depression. No economic downturn resulted from Black Monday in October 1987, when automated trading sent equities into a spiral that was short-lived. But investors lost a lot money and sleep then.
The epic market tumble in 2008, as the outgrowth of the housing mess, began in mid-September with the collapse of Lehman Brothers, which was crammed with sub-prime mortgages and derivatives linked to real estate. The S&P 500 continued to fall as more and more bad news came out. In fact, October that year had the steepest slide of the bear market, down more than 16%.
A September Not to Remember
Momentum considerations come into play here. As Bespoke Investment Group explained the phenomenon: “While September has indeed been the worst month of the year for stocks, the negativity usually comes during years when the market is already struggling entering the month.”
From 1928 through 2008, by Bespoke’s tally, whenever stocks lurch into September already down, they really get slammed. In years when stocks are off through August, the September drop is an average 3.43%. And when the index has lost 5% or more through August, September ends up with a 3.78% dip.
On the other hand, if the S&P 500 has been positive May through August, September has been up as well, averaging a 0.29% gain.
How has September stacked up in the recent past, namely the last five years? It has been merely a mediocre month, and far from the biggest loser. September wasn’t the worst month, but was in the middle of the pack for performance. That middling showing happened to fall during the expanding bull market that coincided with a burst of employment and corporate earnings—conditions that now have been decimated.
In recession year 2020, September’s negative 3.9% showing was only the third worst month to date.
The dubious honors for this year thus far go to the returns for the two months of the bear market that the coronavirus scare triggered: February, off 8.4%, and March, losing 12.5%. The 2020 September slump came despite the blowout May-through-August rally of 21% (continuing a surge that began in late March after that month’s stomach-churning descent).
It could be that the thermometer affects market psychology in the ninth month. Vacation season and warm temperatures lull investors in the summer, hypothesized Leslie Lenzo, Advocate Health Care’s CIO. “They’re spending a greater share of their time and mind-share on fun, family, and friends,” she said. Yet, post-Labor Day, as the air cools, “they realize that the actual data doesn’t show as much optimism as they felt when they happily basking in the sun over the summer.”
October Un-Fest
While just a middling performer, October since World War II possesses the dubious distinction of having the most bear markets (38% of cumulative totals), where stocks fall from a peak by at least 20%, and corrections (22%) a slide between 10% and 20%. The prevalence of such rough patches has made for some of the dizzying volatility. “This has been the capitulation month,” said CFRA’s Stovall, referring to the point when battered investors just give up, marking an end to the downswing.
To date, early in October, the S&P 500 is up roughly 1.5%, a welcome if subdued improvement from September. Volatility is elevated, with the CBOE Volatility Index, or VIX, at 27. That’s higher than average, but in keeping with what’s been occurring all year since the pandemic hit.
The 10th month, however, is the weakest when America elects a president, LPL’s chief market strategist, Ryan Detrick, wrote in a recent research note. The month is down roughly 1% on average in those election years. Detrick noted that “stock prices tend to be weak from now until late October.” But then November and December usually are presidential year gainers.
In the 2016 election year, October slid 1.8%, amid qualms about both presidential candidates, Hillary Clinton and Donald Trump. But after Trump’s victory, amid his pro-market talk, the S&P 500 advanced for the remaining two months of the year. Indeed, October was only the third worst month that year (January and February were negative).
This electoral year, there’s a nagging sense that results of the election won’t be decided on Nov. 3. On top of that that, the possibility lurks that even if a winner can be identified in the race between former Vice President Joe Biden and incumbent President Donald Trump, a transition won’t be a smooth one.
“It’s a real fear—and one that, in many respects, I share,” wrote Brad McMillan, chief investment officer for Commonwealth Financial Network in a note. “The fear is that if we get a disputed election, it could lead to disruption and possibly even violence. If so, we could well see markets take a significant hit.”
A killer virus, a deep recession whose recovery may be sputtering, vicious politics—all the ingredients for the months ahead may make September and October look benign.
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