By about noon on Sept. 22, the U.S. markets were all down nearly 3%. The S&P/TSX composite index was doing even worse, down about 3.3%.
Investors may be itching to pull the trigger and sell their stocks, but perhaps people can take comfort in knowing that, historically, September is always the market’s worst month.
According to Marketwatch, on average the Dow Jones industrial index falls about 1.13% in September. Since 1971, the Nasdaq has fallen an average of 1.02% during the month, while since 1950, the S&P 500 has dropped an average of 0.69% in September.
As of today, though, this month has been a lot worse than the average. The S&P 500 has fallen about 7%; the DJIA is down 7.4%; Nasdaq is down 4.29%, while the S&P/TSX has dropped the most—a whopping 9.4%.
Some people believe that September is the worst month for two reasons: people come back from vacation and start trading again, and many portfolio managers sell out of losing positions because their fund companies report year ends that month.
So even if the economy wasn’t in turmoil, it’s likely your portfolio would be down. But, of course, what we’re seeing now is much different. The main reason for the late-September market dump is because the Federal Reserve announced that it would, once again, purchase long-term Treasury bonds, about $400-billion dollars worth. It’s also selling more short-term government debt.
The U.S. government has done this twice before and it hasn’t had the positive economic impact that most people had hoped. So when the Fed announced on Sept. 21 that it was buying more bonds, it didn’t help assuage anyone’s fears. In fact, it made people more nervous—many think the U.S. is grasping for solutions to its economic woes.
Clark Yingst, chief market analyst with investment firm Joseph Gunnar told The New York Times that improving access to cheap credit—the bond buy has pushed long-term interest rates lower—may not even be the problem. Lower interest rates, he says, could make banks want to lend less.
“It could backfire,” he told the Times.
With Europe’s economic crisis worsening too—Italy was just downgraded by S&P and many people seem to think Greece is on the verge of default—it’s anyone’s guess as to whether the coming months will be even worse than this September.
If history’s any indication though, be prepared for a dismal October. It’s the month that’s seen the largest market crashes.
On Oct. 29, 1929, the Dow fell by 12.8%, starting the depression. On Oct. 19, 1987, the Dow fell 22.6%. Incredibly, North American markets also crashed in October 2008—between Oct. 6 and 10 the Dow fell about 18%.
So hang on to your stocks, it’s likely the bumpy ride won’t be over for a while—at least until November.