Surprise! Stocks Aren’t Guaranteed to Tank in September

Submitted by Wall St. Daily as part of our contributors program

It’s officially September in the market – which is notorious for being the worst month for stocks. And, right on cue, every major media outlet is spreading fear.

Everywhere we look, an ominous headline greets us…

“September is a stock market graveyard,” declares The Globe and Mail.

Over at CNBC, we’re told, “Look out! September market headwinds are looming.”

The approach I fancy the most comes from The International Business Times: “Why September is The Worst Month of The Year: Stocks Tank; Banks Fail.” (Please note… just because it’s September doesn’t mean, say… Bank of America (BAC) is about to collapse!)

I could go on and on with the examples. But you get the point. We should be scared stockless right now.

Granted, uncertainties abound – any of which could reasonably sink the market. There’s the worsening situation in Syria, the imminent start of the Fed Taper – and, of course, the never-ending debt ceiling and budget debates in our nation’s capitol.

But all the fears are overblown. In fact, we might actually be in store for a September surprise. Let me explain…

An Undeniable Tendency

I’m not going to deny that September’s terrible reputation is well deserved.

As MarketWatch’s Mark Hulbert reminds us: “Since the Dow was created in 1896, it has lost an average of 1.09% during September. The average return during all other months, in contrast, has been a gain of 0.75%.”

That’s a spread of almost 2%, which is huge, statistically speaking.

Sadly, the track record for the S&P 500 Index in September isn’t any better…

As Guggenheim Partners’ Scott Minerd wrote in a recent note to clients, “Since 1929, the S&P Composite Index has averaged -1.1% for September, making it one of only three months with negative average returns over that time.”

But does that automatically mean stocks are doomed this September, too, and we should bail on the market until October to be safe? Not a chance!

Don’t Be Misled

As Hulbert notes, there’s no “plausible explanation” for why stocks fare so poorly (and consistently) in September. And he’s right. So it could be just a statistical fluke that should be ignored, not feared.

I mean, changing levels of butter production in Bangladesh statistically explain the majority of the moves of the Dow, too. But you don’t hear about anyone using that data point to make investment decisions, do you?

Of course not. Because correlation doesn’t equal causation. And the same truth applies to any month on the calendar. It might correlate to weak or strong returns. But there’s no causation involved.

What’s more, we need to remember that the stats above merely reflect the averages. Not every single September is a downer for stocks. In fact, stocks rose 3.57% in September 2009 and 2.42% in September 2012 (more about this in a moment).

What about those uncertainties I mentioned before, though? Couldn’t they spark a selloff?

It’s not likely. Known risks tend to be priced into the market already. They’re not the real danger.

So what is? I’ll let the infamous words of former Secretary of Defense, Donald Rumsfeld, tell you:

“There are known knowns; there are things we know that we know. There are known unknowns; that is to say, there are things that we now know we don’t know. But there are also unknown unknowns – there are things we do not know we don’t know.”

It’s that last group of unknowns – things we don’t know that we don’t know – that sinks markets.

They’re also known as Black Swan events. And how in the world do you devise an investment strategy to protect against them? You can’t.

The only reliable and rational solution in any market environment is to use trailing stops and stay invested in the market. And that’s especially true this year.

No Reason for Paranoia, Here

While everyone is fretting over the possibility of a September swoon based on over 100 years of data, the number crunchers over at Bespoke Investment Group uncovered an interesting anomaly.

They discovered that during strongly positive years for the market – when the S&P 500 is already up 10% to 25% by September – average returns are actually positive.

Based on 25 occurrences, the S&P 500 averages a gain of 1.29% in September. And it delivers positive returns 68% of the time, according to Bespoke. (That compares to positive returns only 43% of the time during all Septembers.)

Keep in mind that we already witnessed two such occurrences during the current bull market, which I alluded to before…

Heading into September 2009, the market was up 12.9%. Heading into September of last year, the market was up 11.9%. And in both instances, the stock market defied history and rallied during September.

Bottom line: The market is up big again this year (16.5%). And that means the stage is set for a rally, not a selloff. No matter how much the financial media tries to tell you otherwise.