The Scary Month of September

by Inya Ivkovic, MA

It’s here, September of 2009. And chills are bound to go through this bull market or the bear rally, depending on your viewpoint, as anyone who lived through last fall’s disastrous September must at least suffer from terrifying flashbacks. Historically speaking, the month of September is the worst for the stock markets and oftentimes it had been the precipice from which some of the worst market downturns would get hurled into the abyss. Like many, I am bracing myself for the worst again, wondering if the market has ripened for another collapse.

Unfortunately, for most of the industry participants, the wounds of last September have not yet healed. The collapse of Lehman Brothers brought us within hours of total demise, generating instead one of the worst financial panics since the 1930s. The selloff that ensued in the following 10 weeks erased about 40% of market caps in North America.

Certainly, here lie the dangers of self-fulfilling prophesies. Last September and what happened afterwards is still fresh in many people’s minds. In a way, the majority of us are again expecting something bad to happen. And as we worry and caution ourselves to stay away, we contribute significantly to the expected negative result. At the end, it may not be the market fundamentals or poor economic data that will bring us to our knees, but our own fears and herd mentality.

Granted, fearful investors, yours truly included, are typically not conducive to rational market behavior. But there are other factors that could send this September spiraling down the toilet again. For starters, after enjoying the summer months (or rather mere weeks this year), taking vacations and playing golf, many retail and institutional investors have finally returned to their portfolios. Feeling like procrastinators, some may also feel the urge to clean up things in their dusty portfolios, get the profits out and sell holdings that, like them, did nothing much. This is especially true for institutional asset managers, who often have to get themselves organized before an October 31st fiscal year-end.

Aside from that potential source of selloffs, note that September has been a historically popular time with analysts to take a more conservative stance towards corporate earnings. And the more conservative their views become, the pricier impacted stocks look and the more selling occurs.

Finally, many market observers believe that this September may be in for a considerable pullback anyway, because stampeding this much ahead of the global economic recovery has to result in curbed enthusiasm. Since early March of this year, the S&P 500 Index, for example, rallied over 50%. That degree of optimism resulted in many major technical indicators flashing overbought signals. And when those signals are flashing, well, it’s usually time for a correction.

On the other hand, playing devil’s advocate, I could argue that this September could go against the historical trend. I could argue that there are other indicators, such as currencies, commodity prices, bond yields, volatility indicators, etc., which are still signaling good news for stocks, implying that this September we could still enjoy more gains. Further supporting this theory, but not guaranteeing it, is the fact that, over the past six months, any dips interrupting the overall uptrend were short-lived. That means many investors are still bargain hunting, afraid that they sat too long on the sidelines, missing the rally.

What should you believe? Arguments both for a nightmarish and for a profitable September make sense. I am not psychic and I’m plenty fearful, so this is what I’ve done so far with my portfolios: I have re-evaluated each security I hold within the context of my investment objectives, risk tolerance, and investment horizon. I have reeducated myself on their valuations and, based on this, I sold securities I didn’t like and kept the ones I did. Proceeds from my sales were left to sit in cash for the time being, as I plan to do absolutely nothing this September. In fact, I’ll probably do nothing in October, too, and will revisit the issue of getting off the fence in November and December. Call me chicken, but I just don’t have the stomach anymore for the repeat of last year.