Stocks Heading Up

Following six consecutive monthly gains for the S&P 500, equities started off on a roll in seasonally weak September

By Joseph Lisanti

Stocks started what is traditionally the weakest month of the year with a strong upward move as the S&P 500 powered through what had been the top of a trading range lasting almost three months. Does this mean September will be a good month for equities this year? Or is weakness lurking around the corner?

From 1928 through last year, the S&P 500 lost an average of 1.3% in September, the worst showing of any month. In addition, September ended with the market in the plus column fewer times than any other month over the last three-quarters of a century.

But how does the first September following the start of a bull market look? Sam Stovall, S&P's chief investment strategist, reviewed the data for all bull markets following World War II and concluded that 67% of the time September is positive when stocks are at the start of a new upward move.

Whether we are in a new long-term bull market is a matter of debate, but it is certain that we are in the third year of the U.S. presidential cycle. Since World War II ended, the third year of a president's term has outperformed all others with an average gain of 17.4%. But Septembers in those years have been disappointments: Only four of the 14 have posted gains.

So which indicator should you look at? Checking postwar Septembers in the years that were both the start of a new bull move and the third year of a president's term turns up only two, 1967 and 1975. In 1967, the S&P 500 gained 3.3% for the month, but in 1975, it lost 3.5%.

In short, we are in uncharted territory as far as historical precedent for the month. But it is increasingly clear that the economy is improving, albeit slowly, and the market is on track to post its first annual gain in four years. Keep 60% of investments in stocks.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

Before it's here, it's on the Bloomberg Terminal.