Link of the Month: The SAD State of Stock Market Returns

Why is it that bear markets almost always seem to climax in the fall? October figures prominently in the history of the twentieth century’s market panics and, also in the twentieth century, September carries the lowest returns of any calendar month.

I’m conflicted on this issue as an investor versus a clinician. One can slice and dice months and seasons of varying lengths and configurations, and the statistical significance of the fall dip does not knock one’s eyes out. As an efficient marketeer, I’d be delighted to ascribe the Fall Doldrums to lady luck.

But when I put on my clinician’s hat, I get a different perspective: Seasonal affective disorder (SAD) is a very real disease, and it can devastate a person’s psyche. Depressed individuals tend to devalue everything in their lives, and their financial assets are no exception.

Mark Kamstra of the Atlanta Fed and his colleagues have put together a wonderful working paper examining the relationship between sunlight and markets and, indeed, there is something there. It is well-known that in the northern hemisphere, returns are lowest in the fall, but so are they in the southern hemisphere, where the seasons are six months out of phase with those north of the equator. There is also a nice correlation with latitude; the further from the equator, the lower are fall returns relative to the rest of the year.

For those wishing to reap great profits from this effect, beware—the R-squares on the "SAD variable," which in effect measures the hours of daylight, are not huge. But when October Blues hit the markets, it’s well to remember that spring is just around the corner.

Copyright © 2003, William J. Bernstein. All rights reserved.

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