“It’s a long while from May to December.  But the days grow short when you reach September.
When the autumn weather turns the leaves to flame, one hasn’t got time for the waiting game”……….Tony Bennett.

“Oh Really”…………..Rab C Nesbitt.

What is it about September, October and Stockmarkets?  Did you notice that a 400 point fall (about 2.5%) in the Dow Jones Index last Friday brought shock horror headlines to the fore again?  How’s this for example…“A CORRECTION IS COMING AND THERE’S NOTHING YOU CAN DO ABOUT IT.”  (Spotted by our good friend Mike Williams).

Strangely enough though, September has a poor record for stockmarkets over the years, even worse than October.  All the way back to 1900 September is the worst month for equity returns, average down 1%, and has posted gains only 43% of the time.  October’s in second place.  (source: NDR)

Remember 9/11, that awful September day when the world stood still?  Days like that get seared into your memory.  You still taste the fear.  You remember exactly where you were on the day.  On Sunday night, programmes commemorating the 15th anniversary of that terrorist attack on the World Trade Centre and the Pentagon for me brought it all flooding back.

How about the 15th of September 8 years ago?  Remember that? That day US Bank Lehman Brothers collapsed triggering the worst Financial Crisis since the Great Depression of the 1930s.  The world’s financial system faced meltdown.  It was that bad.  Only one week earlier I’d been at a meeting in Manhattan of “economic and market experts” convinced everything was hunky dory “because the worst was over.”

Black clouds entered the room coincidentally as Joe Kalish of Ned Davis Research entered as visiting party pooper.  We’ve been purchasing NDR independent research since 2001 following the Dotcom bust in 2000 when they were among the very few who saw it coming, so I was aware of Joe but hadn’t met him before.  (Unsurprisingly I keep in touch with Joe regularly nowadays.)

Despite a request from his sales colleagues to lighten up he explained in chilling detail what was expected just round the corner.  He added “We’re heading for possibly the deepest financial crisis ever and you guys don’t get it.”  We didn’t have long to wait.  Days later the shock waves hit.  It was weeks before I had a decent night’s sleep.  Scary monsters.

You don’t easily forget times like that.  Even now I still recall the abject fear I felt way back in October 1962 when I was only fifteen and a half and the Cuban Missile Crisis brought the world to the brink of nuclear disaster.  I went to bed that night convinced I’d never see my parents again.  Yes really.  Just over a year later I got up one morning to discover President Kennedy had been assassinated.  News travelled much more slowly back then thanks to our coal fired televisions with only the occasional news programmes.

Ned Davis Research constantly update their recommended portfolio split between Equities (shares), Bonds (gilts) and Cash Deposits.  In August 2008, before the Lehman disaster, their pessimism was reflected in a split: 40% Equities, 45% Bonds and 15% Cash.  Their benchmark?   55% Equities, 35% Bonds, 10% Cash.

What’s it today?  Despite current media pessimism, today’s recommended split is 70% Equities (15% above the norm), 25% Bonds (10% below), and 5% Cash (half the norm). Does that look like a sell signal to you?

Ned Davis Research also compiled an analysis of “Crisis” events all the way back to 1900.  They’ve noted 42 occasions since when on day one of each “crisis”, stockmarkets actually fell.  One third of them happened in September and October.  That’s double the laws of average.  Typical first day emotional reaction of media and investors is shock.  Stockmarkets usually fall, often rather heavily.  Is that why we refer to Autumn as “The Fall” I wonder?

Here’s some examples of Autumn Dow Jones Index initial reaction.  October Market Crash 1929, down 43.7%, October 1957 Sputnik Launch, down 9.9%, October 1973 Arab Oil Embargo, down 18.5%, Oct 1987 Financial Panic, down 34.2%, Sept 1992 ERM UK Currency crisis, down 4.6%, Oct 1997 Asian Stockmarket Crisis, down 12.4%, 9/11 2001, down 14.3%, Sept 2008 Lehman Brothers Collapse, down 18.8%.

You get the drift.  Want some good news?  NDR also found that following all Dow Jones first day “crises” including these mentioned above, within 9 months the average gain is 16.9%.  Which underlines what we’ve been saying over the years.  Extremes of sentiment like euphoria or fear are bad indicators of future returns unless you take a contrary position.  Not easy to do of course.  But worth the effort.

Why is it that pessimism sounds smart?  Despite things getting constantly better for most of us over time we don’t see it.  Yet Warren Buffett said “normal Americans live better than the richest man the world’s ever known… John D Rockerfeller” who incidentally didn’t have electric light, air conditioning, sunglasses, penicillin, or paracetamol for his hangovers.

Yes, pessimism sounds smarter.  And it seems it’s been this way for ages.  19th Century English philosopher John Stuart Mill wrote 150 years ago “I have observed that not the man who hopes when others despair, but the man who despairs when others hope is admired… as a sage.”

What does Joe think right now?  Despite pointing out that Septembers since 1900 have the worst record for stockmarket gains he’s still optimistic about the next four years. Probability’s on his side given since 1900 equities are in a Bull market 85% of the time.  That won’t make the headlines.  But remind me when headlines helped you invest well?

Alan Steel
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

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