Read the full post at The Christian Science Monitor
Andrew W. Lo is the Charles E. and Susan T. Harris Professor, a Professor of Finance, and the Director of the Laboratory for Financial Engineering at the MIT Sloan School of Management.
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.
If you have good news, you want to rush to tell people about it. If you have bad news, you tend to stall, hoping it will go away or that some good news will come along to dilute it. Companies, it turns out, behave similarly — and therein lies an extraordinary opportunity that most investors have been missing.
I recently studied whether the announcements companies make when they reschedule earnings reports contain important information about the firms. This earnings season, for instance, investors may notice that Apple Inc.AAPL, -0.53% moved forward its expected earnings announcement date to Oct. 20 from Oct. 28. Meanwhile, Coca-Cola Co. KO, -0.64% has delayed its expected reporting date to Oct. 21 from Oct. 14.
What can investors predict from such behavior? Often, quite a lot.
When companies shift a scheduled reporting date, the announcement typically appears routine. Some financial reporting dates are set by regulation, but firms have discretion in scheduling earnings reports.
In this study, I analyzed the corporate reporting calendars of some 19,000 companies from 2006 through 2013. Wall Street Horizon, Inc., a firm that collects events information of publicly traded companies, provided the data.
I discovered that firms which moved up their reporting dates were considerably more likely to report higher earnings, while those that delayed their reporting dates tended to announce earnings declines. The stock values of the companies tracked closely with the earnings trends.
The U.S. stock market is now at new highs. So why are average Americans continuing to struggle and not feeling this prosperity? What causes this apparent disconnect between market highs and citizen well-being?
As the expression goes, stocks are climbing a wall of worry. And by our estimates, despite economic malaise, the stock market hasn’t peaked, and we’re still on the way up. Here are some reasons why:
In the wake of the economic crisis, many companies these days seem to be undervalued. The current earnings-to-price ratios are high and often market commentators argue that these ratios reflect good opportunities to invest. However, the emergence of undervalued stocks comes at a time of high market uncertainty so it’s more important than ever for investors to identify strong investment opportunities based on a company’s fundamentals. Read More