Why Crashes Come In The Fall
September 1, 2009 by Tisa Silver
Filed under Finance
What is a stock market crash and why do crashes tend to happen in the fall?
According to Wikipedia, a crash is a “sudden dramatic decline of stock prices“ across a large section of the market.
According to Investopedia, an index must lose 20 percent of its value in order for a crash to be declared.
Photo by Zest-pk, courtesy of flickr
September provides an average loss of about 1.3 percent, and most crashes occur in the fall, the worst ones have happened in October.
Today, I came across a possible explanation for the losing tradition of the fall season on EconomicPolicyJournal.com.
In a nutshell, Robert Wenzel argues that in the fall there is a major shift from saving to consumption.
Kids go back to school in September, and two major holidays, Thanksgiving and Christmas, come along in November and December.
In order to finance these expensive occasions, people retreat from a pattern of saving and convert to a pattern of spending. Some resort to liquidating their investments for the extra cash.
Seems to make sense, and could possibly go along with one of the theories proposed to explain losses in September. Analysts say the summer months have thin trading volume and in September, the volume returns. Perhaps, those who are returning are returning primarily to sell.
I will definitely keep an eye on spending, advance/declines and volume for the rest of this month!
Gee, I always thought it was because the President and Congress both returned to work after vacation causing investor’s internal economic security alarms to all begin flashing red at the same time…… lols.
But seriously….. I’m not sure how much the individual investor can move the markets compared to the institutions anymore. Do mutual fund redemptions go up in September or contributions remain flat? My theory is that with school back in session and everyone back at work and the end the quarter not far away, they are starting to pay attention to their portfolios again, making adjustments, taking profits after a strong run-up since March, or raising their cash position in anticipation of a pull-back.
Hi Jim, your theory matches up with a few theories I’ve seen about September being a traditionally bad month. Investors who took it easy during the summer come back and begin analyzing more deeply again, and after a run-up like this summer’s they begin taking profits.
I believe too that the institutional definitely trump the individuals. In addition to the individuals’ part in this, I have also been pondering the impact of the business cycle and Q3 financials (as you mentioned), but particularly for retailers because of their pre-holiday inventory needs.