And here comes September

Scarecrow and a yellow moon
And pretty soon a carnival on the edge of town
King harvest has surely come

-The Band

September has a deservedly bad reputation in the stock market: The average September return is -0.65%, according to this nifty calculator from And that’s just since 1950.

scarecrowOctober has a bad reputation, too — it’s the month of the 1929 stock market crash, and the 1987 crash, too. At least since 1950, however, it has been September with the worst record. October averages a 0.68% gain.

Why do stocks fall in the fall? In the 19th century, before there was a strong central bank, there was an actual reason. At harvest time, banks in agricultural areas needed more currency than usual, because that’s when the harvest came in. People who needed corn or wheat needed money to buy it from farmers.

To make sure they had plenty of cash on hand, Western and Southern banks would call in loans and investments from the east, reducing the money supply in places like New York and Boston. As the money supply in the East dwindled, interest rates would rise, making it more expensive to pay for margin loans — loans secured by stocks — and making time deposits more attractive. It was the 19th century equivalent of the Fed raising interest rates.

One of the Federal Reserve’s main functions is to make sure that regional and seasonal money demands are met, so you can’t blame farmers for a punk fall market any more. In theory, absent any monetary reason for a fall decline, September shouldn’t be any worse than December, when stocks rise an average 1.59%.

People have offered several explanations for the rotten Fall market. The most convincing is that mutual funds often have fiscal years that end in September or October, and during that time, they busily sell their bad investments, in large part because they don’t want the year-end report to reflect their bad judgement.

Another is that people come back from vacation and have tuition bills to pay. And for many of us, September seems like the real start of the new year, even if we haven’t seen the inside of a classroom in decades. It’s time to take a hard look at our portfolios and sell the investments we’ve blithely ignored in summer.

September’s tumbles may simply be random: People love to construct patterns out of random events. Most likely, though, it’s a kind of human psychology. You may love the changing colors and the crisp weather of fall, but for millions of years it has meant that dark winter is coming — not the easiest time for hairless creatures with modest night vision. Somewhere in the back of our minds, Fall means digging in, taking precautions, and worrying about the storms to come.

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