It’s widely known on Wall Street that September is the worst month for stocks. This is not just trader superstition. An article published in the Wall Street Journal last year points out that since 1896, the Dow Jones Industrial Average has lost 1.09% in September on average, while returns for every other month average 0.75%. Moreover, September is the only month that shows average declines over the past 20, 50, and 100 years.
While the September swoon is no secret, its precise cause is elusive. Possible explanations for the lower returns range from the complex — one study theorizes that portfolio managers sell stocks with recent losses in September to take advantage of tax breaks before the end of their tax year in October; to the dubious — some strategists claim it’s pure randomness; to the downright bizarre — a study by University of Kansas suggests that the decline in the amount of daylight in New York City in September might spark seasonal affective disorder and make some traders more risk-averse.
Importantly, this lower return was not driven by September alone, even though the September effect is pervasive in the northern hemisphere. Even when September is excluded, there is still a return gap of at least 0.5% between after-holiday months and other times, and the difference remains highly significant.
Think about how typical Wall Street traders spend their summers. They’re at the beach. They’re traveling in Europe. They’re having barbeques and parties with their friends. They’re enjoying life. This means collectively, the market is paying less attention to news. The significantly lower trading volume during holidays is a clear manifestation of this collective inattention. Inattention and lack of trading mean one thing: information is incorporated into prices more slowly than normal.
After the holidays, children are back to school and traders are back to the grind. Information is once again rapidly incorporated into prices. But why are the after-holiday returns (including September) on average negative?
Read the full post at MarketWatch.
Lily Fang is a Visiting Associate Professor of Finance at the MIT Sloan School of Management, and an Associate Professor of Finance at INSEAD.