September 24, 2022

September appears to be the worst month for Seasonal Affective Disorder, which may be the missing link as to why this month is so bad for the stock market.

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Seasonal Affective Disorder, or SAD, is a depressive mood disorder related to the change of seasons. While most of us have heard of SAD, some associate it with September. When we think of SAD, we think of the shortest days of the year in December and January. We are not wrong. More people suffer from SAD in the winter months than in September.

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The stock market doesn’t affect the absolute number of people who suffer from SAD — but changes in that number. And the greatest month-to-month change in people with SAD occurs between August and September, according to one analysis. Data compiled by Dr. Raymond Lamm, Professor and Leadership Chair in Depression Research at the University of British Columbia,

Monthly aggregate data is plotted in the chart above. Note that the highest readings are in September. I suspect you already know instinctively that the picture this chart is painting may be accurate, as many of us begin to experience the depressive effects of SAD around Labor Day – When summer ends, the days are shorter and children return to school. Even though the weather remains warm and daylight hours are almost as long as August, our psyche is already anticipating the coldest and shortest days of winter.

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The researchers were able to link these monthly SAD changes to the stock market by measuring the flow of cash in and out of equity mutual funds. Perhaps the most prominent study to establish this relationship appeared in 2017 in Journal of Financial and Quantitative Analysis, entitled”Seasonal Asset Allocation: Evidence from Mutual Fund Flows,” The study was conducted by Mark Kamstra of the University of York, Canada; Lisa Kramer of the University of Toronto; Maurice Levy of the University of British Columbia and Russ Vermers of the University of Maryland.

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Researchers made considerable effort to eliminate the possibility that monthly changes in the incidence of SAD were a proxy for some other factor previously found to explain stock market changes. After controlling for those other factors, they found a high correlation between the data in the attached chart and the flow in and out of equity mutual funds. The month experiencing the largest net outflow is September.

This is strong circumstantial evidence. Even more compelling emerged when researchers studied the relationship between SAD and mutual fund flows in Australia. Since that country is in the Southern Hemisphere, the incidence of SAD should mirror the opposite of the American pattern. Certainly, mutual fund flows in Australia follow the same pattern as those in the US, shifted forward six months.

effect of september

One of the more interesting implications of this research is its ability to explain the strong historical trend for September as the worst month for the stock market. Although this pattern is statistically robust, I have argued before that you should not bet on its persistence until a plausible and convincing explanation for its existence is found. Till now I was not aware of any such explanation.

Recognizing that there are no fixed bets in the stock market, this research correlating SAD with mutual fund flows provides an otherwise missing explanation. That in turn should boost our confidence when betting on the September weakness.

So far this year it is taking the form of September. As of September 19, the S&P 500 SPX,
down 1.4% from where it was at the end of August, while the Nasdaq Composite comp,
2.4% less.

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Mark Hulbert is a regular contributor to MarketWatch. Their Hulbert Ratings track investment newsletters that pay a flat fee to be audited. he can be reached here [email protected]

More: If you need another reason why a stock is likely to lose money in September, here it is.

What history says about September and the stock market running out of steam after the summer boom