Why stocks fall in August and September and Rise in December

Most people who have been invested in the market for a number of years realise that on average stocks tend to have a negative return during the months of August and September. Looking at data for the S&P500, we can see this phenomenon playing out. In September 2016, the S&P500s return was -0.12%, August 2016 – 0.12%, September 2015 -2.64%, August 2015 -6.26%, September 2014 -1.55%, August 2013 -3.13%. Considering we have been in a bull market over this period, it is peculiar that the average return over August and September for this period is negative.

The reason why the US stock markets – and this other markets which are correlated to it – fall in value over the months of August and September is due September being the the end of the fiscal year for funds. Starting the middle of August through the end of September, funds do their tax loss selling and realising capital gains to close out their year. It’s no different than the average retail investor who waits until year end to do their tax loss selling. The difference is that funds have so much money and move so much volume that September has historically been the worst performing month for the market. Tax loss selling is a major contributor to that.

At the other end of the spectrum, December tends to be a month that brings positive returns. We usually get a Santa Clause rally because the wash rule sales period is over and the funds can then start buying back into the companies they sold during tax loss season and usually get to buy them back cheaper.

Now I’m not saying that Shares will fall in August and September and will rise in December. I can’t predict the future nor can anybody else. The aim of this post is to help you understand why certain months have better performance returns than others and why certain months are prone to negative reasons. So the next time stocks fall in August and September, don’t automatically think that we are in a bear market – it might just be more prudent to buy the dip.