Why September could be a bad month for investors

September tends to be associated with a reinvigoration of the stock market. Refreshed fund managers get back to their desks, liquidity makes a comeback, and many companies of all sizes begin updating their owners on trading over the summer. 

To assume this growth in activity will translate to a general rise in share prices, however, would be to ignore what history tells us. In terms of performance, September traditionally ranks as the weakest month for shares in the whole year. 

Bad for shares, good for gold

According to research by Stephen Eckett – author of Harriman’s Stock Market Almanac — the FTSE 100 has fallen an average of 1.2% in September over the last 34 years. That may not sound like much in the grand scheme of things, but it’s worth mentioning that some years have been especially harsh. Since 2000, three Septembers have included market falls of over 8%. Considering the ongoing trade spat between the US and China, plus confusion surrounding Brexit, it’s not a stretch to imagine history repeating itself. 

Things are even worse outside the market’s top tier. Based on Eckett’s data, the FTSE 250’s performance in September is “particularly weak” when compared to the FTSE 100. 

It’s not all bad news. Given their traditionally negative correlation with equities, it won’t come as any surprise to learn that September has historically been a decent month for gold and gold-related investments. It will be interesting to see if this trend holds in 2018, especially as the strong dollar has significantly reduced interest in the shiny stuff of late.

What’s a Foolish investor to do?

All this talk about September being a traditionally bad month for investors may suggest that it’s wise to sell-up and sit on the sidelines for a while. This would be very un-Foolish.

Unless you desperately need access to your cash, or consider yourself a trader rather than an investor, reacting to short-term fluctuations needs to be avoided. As well as being almost impossible to time the market on a consistent basis, jumping in and out of positions can generate huge commissions for your broker. Over time, these can have a massive negative and needless impact on your wealth.

There’s another reason why it’s probably best to ignore any volatility in September.

Based on data since 2000, October has been the second best month for shares, after April, with prices particularly strong in the run-up to Halloween. In terms of sectors, oil and gas companies tend to do well, while software firms struggle. In contrast to September, October is usually a bad month for gold.

That’s not to say that markets never experience turbulence at this time of the year. As Eckett states: “Seven of the 10 largest one-day falls in the market have occurred in October.” This includes the infamous crash of 1987, when stocks fell 22% in just two days. What’s often forgotten is that the main index performed extremely well over the first half of that year, so some reversion was inevitable. Secondly, even after these losses, shares still bounced back, to end 1987 higher than where they began. 

In sum, although next month may turn out to be a relatively poor one for investors, this is certainly no reason to sell your holdings. In fact, it might be a great reason to take advantage of any opportunities that present themselves.