Stock investors brace for another ugly September

The S&P 500 index is down 14 percent from its high in April, and 5 percent for the month of August alone

Published August 31, 2010 5:33PM (EDT)

The economy is weakening, home sales are plunging and stocks are on a long slide. Now comes something even scarier for investors -- the beginning of what is traditionally the worst month in the market.

Could stocks be headed for another September swoon?

"If history is any guide, for it's never gospel, we may be in for another rough ride," says Sam Stovall, chief investment strategist at Standard & Poor's.

Mutual fund managers tend to clean house after Labor Day, taking profits on winning stocks and weeding out portfolios before putting out the rosiest possible end-of-quarter reports for their clients.

Workers coming back from summer breaks are also inclined to sell stocks as they get their financial affairs in order. Any festering issues with the economy or stocks during the summer, when trading volume is light, tend to get put off until fall.

The result: September is usually a dog of a month for the market. It typically starts with solid market increases, then tails off, says Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac.

"There's just a general selling bias in the month of September," he says.

Four times in the past decade alone, the S&P 500 shed at least 5 percent in September. The average September decline since 1950 is 0.6 percent, according to the Stock Trader's Almanac. February is the next worst, with an average 0.2 percent loss, and December and November are the best, averaging 1.6 percent gains.

Of course, investors haven't forgotten that the financial world collapsed in September just two years ago. And the Sept. 11 attacks, which delivered a devastating blow to the stock market, remain a painful memory.

This year, there's a lot to frown about. The S&P 500 index is down 14 percent from its high in April, and 5 percent for the month of August alone as of Tuesday afternoon.

Stocks have fallen because the economic recovery is faltering. The economy has slowed to anemic growth, home sales the last three months are the worst on record, consumer spending is lackluster and unemployment is stuck near 10 percent.

The slew of weak economic data sapped the market of what little midsummer momentum it had and further shook the confidence of already wary investors.

"I don't think it would take a whole lot to get investors to start selling and consumers to start pulling back again," says Mark Zandi, chief economist at Moody's Economy.com. "The collective psyche is on edge."

Federal Reserve Chairman Ben Bernanke said last week that the central bank is ready to take additional steps to boost the economy, including buying more debt or mortgage securities in order to keep interest rates low.

But with the benchmark interest rate already near zero, any Fed action is unlikely to provide the oomph of past measures. Congress doesn't appear to have an appetite for another stimulus package.

Also hanging over the market is an air of heightened uncertainty because the November elections will determine which party controls Congress for the next two years. The S&P 500 has declined an average 1.7 percent in the September before midterm elections since 1930.

Not that September isn't bad enough already without all of this year's baggage. It's one of only three months, along with February and June, when stock prices typically decline.

The uncertainty is a serious consideration for financial advisers such as Dominick Vetrano of Fountainhead Financial in Chicago. He holds off putting more money into stocks beginning in August, even though he thinks the September market dips are usually psychological.

"There is little to gain by investing right before September and a lot to lose, so why risk it?" he says. "The September effect is well-documented."

Some experienced market participants, however, dismiss the significance of the trend and say it would be a mistake to try to time market decisions based on seasonal data from past years.

Investors ultimately should be guided by the financial health of the companies they're considering investing in. Hirsch, the market historian, agrees that history shouldn't guide investing alone. After all, the S&P 500 advanced 4 percent last September.

But he maintains that the numbers are too meaningful to dismiss entirely.

"You should have a general idea of what the market's rhythm and tendencies are," he says. "And you respond accordingly."


By Dave Carpenter

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