Alpha Power Investing Newsletter

September 1, 2016

The Perilous September/October Period

With the stock market hitting new highs in August - accompanied by low trading volume and low volatility - a sense of complacency seems to be taking hold in the stock market. Based on the history of the stock market, this might be a cause for concern in the near-term.
Figure 1 displays the performance for the S&P 500 Index on a month-by-month basis starting in 1950.
As you can see in Figure 1, September is the only month to show more losing months than winning months over the past 66 years. It also sports the largest average loss (-0.68%). October actually has a decent track record (up 41 times - or 62% of the time - down 25 times, with an average gain of +0.80%). However, this record is tainted somewhat as many investors - not entirely incorrectly - have come to refer to October as "Crash Month". To wit, 1929, 1930, 1932, 1933, 1937, 1941, 1978, 1979, 1987, 1997 and 2008 all witnessed sharp declines in the stock market during the month of October.
The Months of September and October Combined
Now let's look at the combined performance for the months of September and October as one period. Let's also consider the performance of the Barclay's Intermediate-Term Treasury Index (BTI) during this period as compared to that of the S&P 500 Index (SPX).
First the good news for stock market investors. Since 1981, the September/October period has seen the SPX:
  • Advance 24 times (69% of the time)
  • Decline 11 times (31% of the time)
In addition:
  • Stocks (SPX) have outgained bonds (BTI) 21 times (60% of the time) and underperformed only 14 times (40% of the time)
  • The median September/October gain for SPX has been +1.35% versus +1.34% for BTI
On the face of it, these results would seem to clearly suggest that perhaps any fears regarding the stock market during September and October are overblown. But averages, medians and percentages don't always tell the full tale.
The "Recurring Outlier" Risk
The best way to describe the long-term September/October stock market results is to say that "when they are good, they are very good and when they are bad, they are very, very bad." One of the most important concepts in achieving long-term investment success is to recognize and anticipate risks and to take action to mitigate those risks. The September/October time period is a spot-on case-in-point. Figure 2 displays the cumulative percentage gains since 1981 for both bonds (BTI) and stocks (SPX) during this unique two-month period.
Despite the fact that SPX showed a gain 69% of the time AND outperformed BTI 60% of the time during September/October since 1981, in classic "tortoise versus the hare" fashion, bonds have nevertheless vastly outperformed stocks overall.
There are a few key things to note regarding September/October performance over the past 35 years:
  • BTI achieved a cumulative gain of +82.5% (3.2 times greater than SPX)
  • SPX achieved a cumulative gain of just +25.9%
  • BTI advanced 32 times (91% of the time)
  • BTI declined only 3 times (9% of the time)
  • SPX advanced 24 times (69% of the time)
  • SPX declined 11 times (31% of the time)
  • The 3 largest (and only) Sep/Oct net losses for BTI were -1.3%, -0.8% and -0.2%
  • The 3 largest Sep/Oct net losses for SPX were -24.2%, -23.3% and -6.3%
Given the current low level of market volatility, a "spike" in volatility over the next several months would not be at all unexpected. And the bottom line is that when the stock market is volatile during September/October it is typically volatile to the downside.
There is no way to predict for sure whether stocks or bonds will outperform over the next several months. It should be noted that the S&P 500 Index has outperformed the Barclays' Intermediate-Term Treasury Index during the September/October time period during each of the last seven years and 12 times in the last 13 years. Despite this, the long-term results still strongly favor bonds. And another glance at Figure 2 provides a stark reminder of how quickly things can go south for stock investors during this portion of the June through October "Dead Zone" period.
For these reasons, our Mid-Cap Power Index Managed Account strategy will continue to hold intermediate-term treasuries until late-October when we will move to a 1.5-to-1 leveraged position in the Midcap Index in order to take advantage of the first of three of our fourth quarter "power periods."
To read about the complete strategy, go to the Strategies and Performance page of our website at and download the Alpha Mid-Cap Power Index MA brochure and fact sheet.

Jay Kaeppel
Vice President and Director of Research
Alpha Investment Management, Inc.

Disclosures: Past performance is not a guarantee of future performance. Indexes are not investment vehicles. The returns illustrated above are not returns of any Alpha strategy and do not include management fees or the cost of funds, trading, or other expenses. To see the impact of these costs, please refer to the net of fees and expenses performance data for specific Alpha strategies. The illustrations above are designed to quantify the effect of certain time periods on representative market indexes.

Alpha Investment Management, Inc. is an SEC registered investment advisor. Such registration does not imply a certain skill or training and no inference to the contrary should be made. The information and opinions expressed in this document are for informational purposes only. Any recommendation or opinion made in this document may not be suitable for all investors. The information contained herein does not constitute and should not be construed as investment advice, an offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

© 2016 Alpha Investment Management, Inc.

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