Here's why September and October are historically weak for stocks

Why are September and October historically anemic for stocks? For answers, I turned to Mark Higgins, elder vice president astatine Index Fund Advisors and writer of the book, Investing successful U.S. Financial History: Understanding the Past to Forecast the Future.

The answers person been edited for clarity.

What is it with September and October being anemic months for stocks?  Has this ever been the case?

Yes. The astir aggravated panics connected Wall Street person tended to hap during the precocious summertime and aboriginal autumn months. This tin beryllium traced each the mode backmost to the 1800s. A fewer notable examples of exceptional panics see Black Friday of 1869, the Panic of 1873 and the Panic of 1907.

But wherefore September and October?

It is simply a byproduct of an aged weakness successful the U.S. fiscal system. Prior to the reintroduction of a cardinal banking strategy with the transition of the Federal Reserve Act of 1913, the U.S. was constricted successful its quality to set the wealth proviso successful effect to marketplace conditions.

The inelasticity of the U.S. currency made the precocious summertime and aboriginal autumn months an particularly precarious time, owed to the cultivation financing cycle. In the 1800s, the U.S. system inactive relied heavy connected cultivation production.  For the archetypal 8 months of the year, American farmers had a constricted request for capital, truthful excess funds held connected deposit successful authorities banks were shipped to New York banks oregon spot companies to gain a higher complaint of return.

When harvest clip arrived successful August, authorities banks began withdrawing their superior from New York, arsenic farmers drew connected their accounts to money transactions required to vessel crops to market.

The cultivation financing rhythm created chronic shortages of currency successful New York City during the autumn months. If these shortages happened to coincide with a fiscal shock, determination was small flexibility successful the strategy to forestall a panic. 

How did the authorities respond to these panics?

The constricted quality of the authorities to respond was the superior impetus for the transition of the Federal Reserve Act of 1913. The Act granted the Fed the powerfulness to service arsenic a lender of past edifice during fiscal crises. Prior to the Act, starring financiers (most notably J.P. Morgan) were forced to assemble advertisement hoc solutions that relied chiefly connected backstage capital. After the U.S. hardly avoided a catastrophic illness of the fiscal strategy during the Panic of 1907, determination was conscionable capable governmental enactment for the instrumentality of the 3rd and last iteration of a cardinal banking strategy successful the United States. 

Did the instauration of the Federal Reserve supply much stableness to markets? 

Yes, and if 1 compares the frequency, strength and misery of fiscal panics during the 1800s, this is plainly evident. In fairness, the Fed made a fewer mistakes on the way, with the astir notable being its nonaccomplishment to halt the contagion of slope failures successful the 1930s. But, by and large, the U.S. fiscal strategy has been overmuch much unchangeable since the Federal Reserve became operational successful precocious 1914. 

Still, the U.S. system is not chiefly cultivation anymore.  Why are September and October inactive anemic months?

People thin to fearfulness things that person happened earlier adjacent if they don't retrieve the root of the fear. It whitethorn beryllium that the autumn panics person repeated truthful galore times that they person go a self-fulfilling prophecy. In different words, radical expect them, and due to the fact that they expect them, they behave successful ways (i.e., reducing hazard successful precocious summertime and aboriginal fall) that marque them much likely. I cognize this sounds similar a stretch, but it does look similar it whitethorn really beryllium real.