Come September...

Historically, stocks have been weak in the final month of the third quarter. Was 2004 an anomaly?

By Joseph Lisanti

We are approaching what is traditionally the nastiest month for stocks. Since 1928, the S&P 500 has declined an average of 1.3% during September. That's the worst record of any month. But last September the index rose almost 1%. Is it time to reconsider the month's reputation?

Many people believe that data from the early part of the 20th century are not relevant to today's markets. Let's assume for a moment that they are correct and consider only more recent events. Since the beginning of 1980, there have been 26 months in which the S&P 500 declined more than 5%. Six of those drops were in September. (August was second with five.) No other month had more than two declines of that magnitude.

September also boasts the third-worst monthly slide since 1980, an 11% drop in 2002. Only the October 1987 crash and the 14.6% decline in August 1997 during the Asian currency crisis were worse. And though last September saw market gains, the preceding five Septembers were down months for stocks.

Since 1980, September has seen an average decline of 1.2%. That's very close to the long-term performance for stocks during the month. And September is the only month that has shown an average decline in the past 25 years.

Based on September stock market activity in recent years, we conclude that the month still deserves its reputation as a loser. Even so, we don't suggest that you dump stocks in anticipation of weakness. We continue to believe that the S&P 500 will post modest gains in 2005 and finish the year at 1270.

That projected 4.8% advance over the 2004 close is probably a disappointment for many investors following last year's 9% gain and the 26.4% advance in 2003. But we think that stock prices are still adjusting to the post-bubble world. A slow and steady climb in equity prices may try the patience of some market participants, but may also result in more lasting gains.

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

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