While most investors want to believe that they make their investment decisions based on data and analytics, in the end, sentiment and sentiment play a big part - every investor. may have different reactions to different market conditions!

If investors predict the government will have a fiscal stimulus or cut interest rates, they will trend to buy more on the expectation of good market performance. Don't believe it? Looking back at the past, we will see that every time the Federal Reserve cuts the lending rate by 25 basis points, the S&P 500 has risen 0.16% on the same day and 0.57% for more. one month. Conversely, an unstable government or an increase in tax rates can cause a tendency to mass sell-off. An interesting way to understand how investor sentiment has historically affected the market is to look at stock market calendar-related effects.


The stock market has changed day by day over the centuries. It always has a seasonal increase/decrease based on demand for specific products such as an increase in demand for natural gas in winter ... This leads to confidence that the stock price will evolve at different times of the year. So an investors can buy stocks of natural gas companies before the winter months and make a profit when prices rise. Although this is a demand-driven strategy, there are a number of other beliefs that are entirely based on the historical performance of the market.

The Calendar effect is one of the beliefs that investors expect the stock market to perform differently during specific times of the year. There are many popular effects that can be mentioned as January Effect, "Sell in May and go away" effect (sold in May and gone), September effect, October effect ... Although experts believe such effects are just superstitions, there is a tendency to eclipse investors' portfolio analysis. However, in this article, we will go through the September Effect specifically and analyze it methodically!


WHAT IS THE SEPTEMBER EFFECT?

Before diving into details here's what most people believe about the September Effect ...

September is considered the worst time of the year for the stock market. In fact, many analysts claim that over the past 90 years of the modern stock market, September has yielded a negative average return - worse than any other month!


Source: Fisher Investment

As you can see in the table above, the only month with a negative average return is September, which explains the popular belief in the September Effect.

Many experts believe that in most Western countries, investors will return after their holiday in September and start trading, leading to increased volatility in the market. Another explanation is that many investors will try to reap their tax losses by selling stocks in September, leading to a bearish market. Another probable cause is that many Mutual Funds typically have year-end finances that end in September. In addition, fund managers trend to reclaim their nonprofit positions first when the year ends.


THE ORIGIN OF THE SEPTEMBER EFFECT

Although no one knows the exact origin of the September Effect, the first published analysis of the Calendar Effect can be traced back to 1987 in the first issue of the Journal of Economic Perspectives (Thaler, Richard H 1987. “Anomalies: The January Effect.” Journal of Economic Perspectives, 1 (1): 197-201).

While core economic theory holds that stock prices follow a martingale chain (or series of random variables) and they shouldn't have any systematic pattern, Calendar Effects like the September Effect are quite common. Out.


SO IS THE SEPTEMBER EFFECT REAL?

Which brings us to the question: Are Calendar Effects like September Effect real? As an investor, should you be wary of investing in September? Or should you focus on your current portfolio instead of being misrepresented by these beliefs? Please join me to answer these questions!

One important observation made while investigating the September Effect is since 1925. Here is some really bad performance in September:


The first two months (1930 and 1931) were during the Great Depression. Another thing that all these months have in common is that they are sandwiched between huge Bear (bearish) markets. Unlike many feared by investors, stock prices have not miraculously dropped because of September!

The interesting thing about data mining is that the choice of data points plays an important role in determining the positive/pessimistic tone of the analysis.

For ease of visualization, assuming we take the average September return since 1925, the number will be about 0.10%. This implies that there has been a number of ups and downs BY PAINTING in September over the years.

So, the more appropriate question is: Why do investors believe in the Calendar Effect? And the simple answer is that people are more likely to believe in observation than in pure science. So, when they see that September is the only month with average negative monthly returns, they'll be more likely to believe it's a systematic model and it can happen again.

However, there is a pretty conundrum: Are Calendar Effects like the September Effect really a sign of market laws, or are they just the result of big data mining is done? for several years? To solve this mystery, many researchers have conducted a number of experiments and tried to determine the validity of anomalies in the market.


PEOPLE LIKE THE RULES

Most of us like to believe that we don't take rules seriously, but the fact is that the human brain is programmed to find rules and obey them. However, it is important to remember that while finding correlations or patterns may be natural to us, we need to focus on understanding the cause of that correlation. So, if the market performs poorly in September, what is the cause?


If you can pinpoint the cause, you'll have a pattern of action to take advantage of you. If not, then it could just be a coincidence! So, even if you observe that September has delivered poor average returns over the past 9 decades, that's just an interesting observation!

Does a stock's past performance indicate its performance in the future? Possibly, if the underlying causes repeat in the future! Otherwise, investing in a stock based on its past performance can be a counterproductive strategy.

In addition, under the Effective Markets Hypothesis (EMH), the price of an asset fully reflects all available information, and they react only to new information. This means that investors cannot beat the market because "news" cannot be predicted.


SO WHAT SHOULD YOU DO IN SEPTEMBER?

Investing should be a well-planned process. Buying and selling stocks should be based on your investment plan, including your financial goals, risk tolerance, and investment opportunities. Whether you are planning a long term or a short term investment, your decisions should be based on specific observations and actionable, NOT emotional!

Volatility is an inherent part of the market. Furthermore, there are many reasons for volatility. Whether the market goes up or down, we cannot predict it. While there are many studies that try their best to predict market performance, the odds are always 50-50.


So, I think that you should focus on the fundamental analytical principles of investing. You must evaluate and analyze the assets that you are investing in. It is important to be realistic with expectations from investments to be able to control risks well. Market performance at certain times of the year is a good statistical observation, but buying and selling stocks on the assumption that these effects will recur, may be counterproductive.


EPILOGUE

All studies have shown that although September has the same amount of positive and negative returns, no cause is the same. Hence, creating an investment strategy based on this observation can be quite risky. Usually, investors with a strong fundamental analysis approach to investing will trend to overcome such movements in the market and make good returns in the long run.