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Since The Great Depression, September Has Been The Worst Month For Us Stocks

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A recent survey of investor sentiment showed 51.6pc bulls, 19.8pc bears and 28.6pc "expecting a correction". The bearish reading is incidentally the lowest since the market peaked in 2007, suggesting, worryingly, that six months into the rally there are no longer many out-and-out non-believers. The marginal buyer has already bought as the FTSE 100 has risen to within a whisker of 5,000.

But the last group is the interesting one. It contains the historians reminding themselves that September and October are traditionally the two worst months of the year, offering negative returns on average and a greater likelihood of a major crash than other two month stretches.

Since 1929, September has been the worst single month for US stocks, with the S&P 500 losing 1.3pc on average compared with an average monthly gain of 0.5pc for the year as a whole.

After the last two years, it would require a cavalier disregard for history not to worry what the autumn holds in store for investors. September 2007 was the month that saw those shocking queues outside Northern Rock, while September 2008 brought us the collapse of Lehman Brothers and the market meltdown that followed in its wake. We can only hope that bad news does not always come in threes.

So why do shares trip up so often in the ninth month and what's the chance of them doing so again this year? It is hard to take seriously the most widely quoted reason – the big cheeses coming back from the beach and reassessing their portfolios. Even if they ever did, big investors don't just switch off for the summer any more, leaving the office boys in charge.

More plausible is the idea that September is the month when companies admit that full year forecasts look too optimistic and analysts begin to rein back their expectations. Neither would I dismiss the psychological explanation that investors simply become more pessimistic as they start getting up in the dark again.

In part, too, the September swoon is self-fulfilling, with investors taking some cash off the table in an act of financial finger-crossing.

This year there are some specific reasons to be cautious. The first is the pace and scale of the recovery from the March low. The UK benchmark is up 40pc, an impressive run albeit less than the 47pc posted by the Dow Jones index and almost 60pc for the MSCI World index. It would be unrealistic to expect markets to remain on this trajectory.

Second, the recovery has been fuelled by a dramatic earnings recovery, which would be fine had the bounce in profits been driven by a genuine improvement in sales rather than the one-off benefit of cost-cutting.

Finally, it is hard to reconcile the rapid rise in the stock market with the slower trend growth implied by debt-laden consumers and governments, rising unemployment and still tight credit. Against this backdrop it would not need another Northern Rock or Lehman to take the wind out of the market's sails.

Sometimes the cracks are seen in the secondary indicators before they show up in the main indices, so a divergence between the leading market benchmarks and measures like the Baltic Dry Freight index (down 44pc since the beginning of June) and the Chinese stock market (off in six weeks) could be a harbinger of a difficult period ahead.

For all these reasons to worry, there are counter arguments to underpin the markets. The most important is that there is clear evidence that economic growth has returned to positive territory in all the major economies in this third quarter. The first stage of the stock market recovery (from March to May) reflected relief that we were not heading into a rerun of the Great Depression. The gains since have reflected unexpectedly good economic news.

A second factor underpinning higher prices is the implicit assurance from central banks that interest rates will stay low for the foreseeable future. There is none of the usual bull market fear that growth will be snuffed out by tighter monetary policy. If they have to make a choice between too much stimulus or too little, there is little doubt that central banks will top up the punch bowl.

Investing by the calendar is an unreliable approach. The claimed predictive power of January's stock market performance for the rest of the year is pretty variable and anyone who sold in May and went away in 2009 will not be happy. Let's hope the September effect also takes a break this year.

So will history repeat and Sept will again prove to be a bad month for stocks?

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