September is Stocks' Cruelest Month

The market is due for a correction. But even if it gets one, stocks should resume rallying later this year once the immediate crises are addressed, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Since 1971, September has been by far the worst month of the year for US stocks. The average September return on the Standard & Poor's 500 Index (SPX), from 1971 through 2012 is a loss of 0.52%, according to the Stock Trader's Almanac.

Considering that only three other months show an average loss of any size over that period, and that the second-worst loss is the 0.1% turned in by February, September sticks out like a very sore thumb. (October, feared as the month of crashes, shows an average return of 0.74% in that period. Not as good as December's 1.7% return, of course, but then December is the head of the pack.)

Now whether or not you believe in historical stock market seasonal patterns, the September data is a useful warning flag. If the numbers simply draw your attention to September and the likely trends this year, they've served an important function.

Because on projections of current news, September shapes up as a volatile month, with way more downside risk than upside potential. September sure looks like a month for taking less risk rather than more, for having more money on the sidelines rather than less, for thinking about protecting gains and principal rather than rolling the dice.

And that's especially the case because it is extremely likely that any fears that take stocks lower in September will have passed by October or November.

I think investors would like to have some cash on hand as we flip the calendar page to October, just in case September lives up to its downside potential and creates a bargain or two.

The immediate threat

So why do I think September has such downside potential? The Federal Reserve, for one, and the political parties occupying opposite ends of Pennsylvania Avenue in Washington, DC.

The Federal Reserve's Open Market Committee meets on September 18, and at the top of its agenda is the matter of when to begin reducing the central bank's program of buying $85 billion a month in Treasurys and mortgage-backed securities. And that's making the stock and bond markets nervous. The fear is that any reduction in the Fed's monthly purchase will cause long-term interest rates to move higher, suppressing US growth.

The Fed hasn't done a particularly effective job at allaying those fears because, in my opinion, it hasn't wanted to. Letting market fears push interest rates gradually higher and asset prices gradually lower would make an actual transition to a slower rate of purchasing—or to the eventual end of the entire program of buying—easier for the Federal Reserve, by taking some of the air out of asset prices over a longer period of time, rather than all at once. The Fed's repeated assertions that its decision will be based on the economic data has served to keep the market on edge, and that may be exactly what the Fed wants.

What's the Fed's read of the economic data? It's not exactly crystal clear, but I think the Fed is saying that the economy is strong enough that a reduction in purchases is likely, either in September or at the FOMC meeting in October.

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