When Investing, Don't Sweat September

Off all the methods of analysis, I find few less relevant than so-called seasonality, the notion that stocks tend to trade either higher or lower based on the day of the month, the month of the year or the year of the decade. There are as many supposed “cycles” are there are pundits to promote them, from the presidential election cycle to the January Effect.

There’s been much discussion in recent days about the prospects for stocks this September. As was reported in the Wall Street Journal, data from Dartmouth finance professor Kenneth French demonstrate investors have lost an average of roughly 1% during the month of September since 1926. It is the only month of the year with an average negative return.

The implication is that investors would be well served by exiting the markets come Sept. 1 and re-entering in October. Given the historic run equities have enjoyed since early March, there is no doubt a temptation to snatch profits ahead of a historically weak month.

But like the oft-mentioned Super Bowl indicator, I dismiss these types of calendar-based analysis when it comes to allocating assets. The truth is that the historical negative return for stocks in September is just that – a long-term average going back over 80 years. We can examine market returns over long periods of time but our portfolio exists in the here and now.

As I see it, what the market did in September of 1927 has literally nothing to do with what it might do in September of 2009. My belief is that the best indicator of today’s market is today’s market that, as we’ve witnessed in recent months, has actually shown quite a bid. Why alter your approach today because of September’s performance during the Eisenhower administration?

In recent years, with the exception of 2008, September has actually been a strong month, rising each year from 2004-07, before getting decimated in 2008.

S&P 500 total return in September:
Sep-04: 1.08%
Sep-05: 0.81%
Sep-06: 2.58%
Sep-07: 3.74%
Sep-08: -8.91%
Source: Standard & Poor’s

An investor who decided to dump stocks in September of 2007 because they were fearful over the long term average negative return ended up missing an appetizing 3.74% return on the table. This is why using long-term averages for short-term market analysis is, at best, akin to tossing a coin.

After a relentless rally since March, stocks could easily correct and consolidate in the coming weeks, including dropping well into September. But to suggest the month is somehow cursed puts an inordinate amount of faith in what is ultimately a statistical quirk. With thousands of trading days and data points to study, some month of the year is going to end up at the bottom of the pack. If it wasn’t September we were worried about, it would be any one of the other 11 months.

Last week underwear maker Maidenform Brands (MFB) beat analysts' estimates, posting a second-quarter profit of 31 cents a share. Driven by cost cuts and its shapewear products, the company is now estimating full-year earnings of $1.10 to $1.16 a share, up from its previous estimate of $1.00 to $1.10 a share. Shares have nearly doubled since March.

If you’re aching to get into ladies underwear, consider taking a look at Kyoto, Japan-based Wacoal Corporation (WACLY), a dominant world-wide manufacturer of intimate apparel (read: underwear). Trading just under book value of $63.59, the stock hasn’t enjoyed the monster run-up of other consumer names since March and remains largely unfollowed in this country.

Stock Up on Skivvies?

Wacoal Corp. (WACLY) – 4 years