September gloom could explain why stocks are taking a hit this month

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September appears to be the worst month for seasonal affective disorder, which may be the missing link in why the month is so bad for the stock market.

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

What affects the stock market is not the absolute number of people with SAD, but changes in that number. And the biggest change from month to month in people with SAD occurs between August and September, according to an analysis of data compiled by Dr. Raymond Lam, professor and chair of leadership in depression research at the University of British Columbia.

Monthly composite data is plotted in the chart above. Note that the highest reading is in September. I suspect you already know intuitively that the picture this graph paints might be accurate, since many of us start experiencing the depressive effects of SAD around Labor Day: as summer draws to a close, the days get shorter and the kids they go back to school. Even though the weather is still warm and the daylight hours are almost as long as in August, our minds are already anticipating the colder and shorter days in the dead of winter.

The researchers were able to connect these monthly SAD changes to the stock market by measuring cash flows into and out of equity mutual funds. Perhaps the most prominent study making this connection appeared in 2017 in the Journal of Financial and Quantitative Analysis. Entitled “Seasonal Asset Allocation: Evidence from Mutual Fund Flows,” the study was conducted by Mark Kamstra of Canada’s York University; Lisa Kramer of the University of Toronto; Maurice Levi of the University of British Columbia and Russ Wermers of the University of Maryland.

The researchers went to great lengths to rule out the possibility that the monthly changes in SAD incidence were an indicator of some other factor previously found to explain changes in the stock market. After controlling for those other factors, they found a high correlation between the data in the accompanying graph and the inflows and outflows of equity mutual funds. The month that experiences the largest net outflow is September.

That’s strong circumstantial evidence. Even more compelling is what emerged when researchers studied the correlation between SADs and mutual fund flows in Australia. Since that country is in the southern hemisphere, SAD incidence should mirror the opposite of the US pattern. Sure enough, mutual fund flows in Australia follow the same pattern as in the US, shifted six months forward.

the september effect

One of the most interesting implications of this research is its ability to explain the strong historical tendency for September to be the worst month for the stock market. Although this pattern is statistically strong, I have argued before that its persistence should not be bet on unless a plausible and convincing explanation for its existence can be found. Until now I was not aware of such an explanation.

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

Until now, September this year is adhering to the form. As of September 19, the S&P 500 SPX,
is down 1.4% from its position at the end of August, while the Nasdaq Composite COMP,
it is 2.4% lower.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at

Plus: If you need one more reason why stocks are likely to lose money in September, here it is.

Plus: What history says about September and the stock market after the summer bounce runs out of steam

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