London: Investors hoping for clarity within financial markets next month after a summer of risk-on, risk-off drift may get more than they are bargaining for -- September is as much about major losses as it is gentle gains.
Data from Thomson Reuters Datastream, furthermore, shows that within this volatility, September is on average the worst month of the year for developed market equities.
With movements among assets highly correlated at the moment, this has even greater implications than normal for currencies, government bonds and corporate debt, as well as for stocks.
The correlation between developed market stocks and the Japanese yen/Australian dollar, for example, has been above 0.8 during the latest three months, roughly meaning that every time stocks rise or fall so does the Aussie against the yen and vice-versa.
Over the past 30 years, the MSCI World index of developed stocks has lost an average of 0.9% in September, compared with a loss of 0.2% in June and gains in every other month. April is the best, up 2.5%.
Burrowing further down into the data shows that September has actually been an up month slightly more than half the time, or in 17 out of 30 years. But its average has been dragged down by at least seven black Septembers, with losses ranging from 4% to 12%.
Some of these have been specifically event-driven -- 9/11, the collapse of Lehman Brothers and so on. Analysts note, however, that September is also the month when investors reassess their portfolios after the northern hemisphere summer break.
“People do come back and realise that things are worse than when they went away in the summer, or have not improved,” said Andrew Clare, professor of asset management at Cass Business School in London.
With the US economy struggling more than it was a few months ago -- a condition corroborated by the Federal Reserve itself -- this does not bode well for risk in the coming month.
The significance of September over other months is that it is supposed to be the time that investors get back to work after the summer break and volumes pick up.
The old British market adage “Sell in May and go away. Stay away till St Legers Day” hints at this, given that the St Leger horse race, first run the year the US Declaration of Independence was signed, is run this year on 11 September.
There are mixed reviews of how good a market guide the adage is, but there is little doubt that September does see the return of volume to markets. Again looking at the last 30 years, Thomson Reuters data shows an average jump of 13.6% in trading volume on Datastream’s combined US and European stock indexes between August and September.
Volume itself, however, does not tell investors anything about direction -- December is one of the best for returns, for example, but volume typically falls from the previous month.
It does mean, however, that the sharp movements sometimes seen in lower-volume July and August are not as exaggerated. “In thin markets the slightest bit of activity can push them one way or another,” said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin.
“All of this comes to an end (in September).”
So history suggests that September is volatile and can see major losses on stock markets that in current conditions would be likely to hit other riskier assets as well.
It also suggests that some volume will return, easing the exaggerated moves that can occur in summer. But does the month tell us anything about what to expect in the following quarter?
The answer to that is not clear cut. Comparing developed stock market gains and losses in September with those in the fourth quarter over the past 30 years comes up with a small, positive correlation of 0.2.
This means that more often than not what happens in September also occurs in Q4, but not in a way that provides any certainty. Interestingly, however, the correlation over the past 10 years is twice as strong, at 0.4.
So, buckle up for September, it could be a meaningful ride.