Stockmarkets: Beware the coming September slump

published 28 August 2009

Bears who reckon that overheated stocks are set for an autumn dip have market history on their side.

In America, investors have lost an average of almost 1% in every September since 1926. In each of the other 11 months, they gained almost 1%, says Brett Arends in The Wall Street Journal.

It's a similar story here, says Chris Dillow on Investorschronicle.co.uk. Since 1966 the All-Share index has returned 0.9% on average in September. And that's not just down to "a few awful months".

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Strip out the three worst Septembers and the month's average return is still 0.16%, worse than any other month bar June.

The big picture: the banks' debt binge

This chart from the Bank of England's Andrew Haldane is a stark illustration of the banking debt bubble, says Tim Price of PFP Wealth Management. It shows the results of a hypothetical bet, made in 1900, on banks outperforming non-bank sectors.

One hundred pounds was invested in banks and £100 in shorting the rest of the market. Until 1985, this would have returned 2% a year; by the end of 2006 the figure soars 16% before falling to under 3% in late 2008.

Banks boosted their return on equity, a key gauge of profitability, to spectacular levels by loading up on leverage, an effect that went into reverse when the bubble burst.