Here comes September, the most dangerous month for markets - Bestinvest

Jason Hollands, Managing Director at Bestinvest, the online investment service comments:

"For most of us, the arrival of September signals that the end of the summer is just weeks away. Children will soon be back at school, the calendar of summer sporting and social events is giving way to the football and rugby seasons and, this year, people are expected to return to working in offices in greater numbers over the coming weeks after more than a year working from home.

"For investors however, September spells danger, as it is a month with a reputation for volatile markets. This is more than a myth."

Bestinvest has have crunched the data for monthly global share price returns (using the capital returns on the MSCI World Index in Sterling, which comprises the shares of the largest companies across the globe) over the last forty years. Bestinvest's analysis has found that September is the only month where share prices have, on average, fallen (by -0.96%). Moreover, Bestinvest have also found that global share prices have declined in September 21 times out of the 40 months observed, making it the month with the highest incidence of declines and the only month where prices have declined more than half of time. In contrast, global share prices have delivered positive returns 80% of the time during the last forty Decembers.

Source: Bestinvest / Lipper (monthly returns, capital-only, MSCI World Index GBP, for last forty years).

Hollands continued: "While the data does clearly show that September is, typically, the most dangerous month for investors, historic patterns do not mean there is any inevitably that equity markets will face a bumpy month ahead in September 2021.

"However after a very strong start to 2021 when the MSCI World Index has surged 16.2% in capital terms (and 17.7% when re-invested dividends are factored in) it is important to realise that markets never move in an unbroken upward direction forever and occasional pullbacks are to be expected.

"After a tremendous rally in share prices this year, fuelled by vaccine optimism and huge monetary and fiscal stimulus programmes, there is evidence that momentum in global equity markets has been fading now that GDP numbers have rebounded. Anecdotal evidences indicates some fund managers have been buying derivates to protect against market falls.

"While equities can continue to rally further from here, there are also a number of headwinds including the prospect of central banks tapering down their stimulus programmes to contain rising inflation and interest rates eventually creeping up off their all-time lows. Historically demanding valuations for technology companies, high levels of corporate debt in the US and brewing concerns about a surge in the Delta variant of COVID-19 are other reasons for caution too. Geopolitical risks are ever present, including worries about whether Afghanistan will become a safe haven for terrorists again and ongoing US-China tensions.

"Does this mean investors should batten down the hatches and make changes to their portfolios? If you are a long-term investor rather than a short-term trader, it is unwise to make major changes to your portfolio on the basis of short-term 'what if?' scenarios that may not play out – providing your portfolio is well positioned to meet your longer-term goals in the first place.

"At a time when inflation is ahead of long-term target rates – and could still potentially resume an upward trend – neither cash or government bonds look compelling and equities are still the main game in town. However, it does make sense to tread with a little caution towards those parts of the market where valuations are stretched and lean towards more defensive strategies, such as funds focused on quality, companies with high recurring revenues that are able to sustain and grow their dividends.

"And if September does end up, once again, taking investors on a bit of a roller-coaster ride, it is important not to panic but keep calm and remember that sell-offs in stock markets are often a good opportunity to make additional investments rather than a time to start ditching your shares and funds."