September Seasonality: ANOTHER Reason to Sell Stocks

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The S&P 500 suffered its worst August since 2001, and if seasonality is any guide, September could be even worse.

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After all, the month of August has never been great for stocks, but it does produce price gains on average. Since 1928, the S&P 500 has generated an average price gain of 0.7% in August, according to Yardeni Research. That actually makes it tied for the fifth-best month for stocks, along with June and November.

September is another matter all together. It is seasonally the S&P 500’s worst month, logging an average decline of 1%.

True, these are just averages computed over the very long term, but seasonality does matter — it affects market psychology. And with September having a reputation as a dud month for stocks, the timing is especially poor for the market to arrest its steep slide.

Sentiment on stocks is already negative enough. Just look at what the blue-chip Dow Jones Industrial Average is doing.

Most of the 30 Dow Jones stocks derive significant revenue from overseas, so investors are right to mark down the DJIA on weakness in China and a strong dollar.

That said, these are all giant blue-chip companies. They have the revenue diversification and balance sheets to hold up better than most amid a global slowdown.

And yet the blue-chip index is getting smoked worse than the broader market. Indeed, the Dow had its worst August since 1998. More ominously, it’s underperforming the S&P 500 so far this year. The broader market was off 4.2% before Tuesday’s selling, while the Dow Jones was down 7.3%.

That’s not how it’s supposed to go.

Using the Dow Jones Industrial Average SPDR (DIA) exchange-traded fund, the blue-chip average has a beta of 0.92. That means the Dow is supposed to underperform the market on the way up and hold up better on the way down.

Weak Seasonality Hurts Market Psychology

On a relative basis with other equities, the Dow Jones carries less risk, and yet it’s getting no buffer against fear and a flight to safer assets.

When investors are scared, they’re even more irrational than usual. That’s why the pace at which stocks are selling off on China fears is all out of proportion to the potential impact.

For one thing, David Rosenberg, chief economist and strategist at Gluskin Sheff, points out China’s economy has only a 16% correlation to the U.S. economy, and is therefore insignificant. Besides, it’s not like China started crumbling overnight. Its growth rate has been in decline for two years.

At the same time, U.S. growth is higher than projected and appears to be accelerating. The labor and housing markets haven’t been this healthy since before the financial crisis. Outside of the energy sector, corporate profit growth remains solid.

And how is it possible that a Federal Reserve rate hike hasn’t been priced into stocks already?

The global macroeconomic outlook hasn’t changed nearly as much as the market has. This market-wide selloff is overdone.

But with seasonality weighing on investors’ already-fragile psyches, don’t be surprised if we don’t find a bottom until October.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/seasonality-sp-500-stocks/.

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