The introduction of pumpkin-spice lattes to menus means the end of summer is approaching, along with positive vibes
The thought of sipping hot pumpkin-spice lattes (PSLs) around a bonfire means you know the end of summer may be coming.
Investors need to be on their guard against the pumpkin-spice latte effect, which is about to rear its ugly head.
I'm referring to how our moods sour as summer comes to an end and coffee chains promote the gourd-flavored beverages. Researchers have found that, more often than not, the end-of-summer blues lead to stock market weakness.
Many of you will object that summer is not yet over. Labor Day is still more than three weeks away, after all. Sipping hot pumpkin-spice lattes (PSLs) around a bonfire is the last thing on our conscious minds.
Yet our unconscious minds know the end is coming. Dunkin' is launching its PSL menu next week, with Starbucks' $(SBUX)$ launch set for the following week. And if PSLs aren't enough to signal to our unconscious that fall is just around the corner, there's Halloween. Major retailers such as Target (TGT) and Home Depot $(HD)$ formally launched their Halloween lines in mid-July.
According to psychologists, our depressed mood that results when summer gives way to fall is a symptom of seasonal affective disorder (SAD). And we know that SAD has a big impact on the stock market. One study, "Seasonal Asset Allocation: Evidence from Mutual Fund Flows," found a strong inverse correlation between the stock market and SAD.
SAD is normally associated with the winter months, such as January and February. But it's not the absolute level of SAD that impacts the stock market, but changes from one month's level to the next. According to Raymond Lam, professor and leadership chair in depression research at the University of British Columbia, no other month-to-month change in SAD is as great as the one that takes place from August to September.
SAD solves the September mystery
The pumpkin-spice latte effect solves what has previously been a mystery: Why is September the worst month of the calendar for the stock market? While September's dreadful average return has been known for years, statisticians constantly reminded us that, absent a plausible rationale, it's too risky to bet on a poor September. SAD and the PSL effect can provide us with some of that rationale.
How dreadful is September's average? Since the Dow Jones Industrial Average DJIA was created in the late 1890s, September has seen stocks end higher 43% of the time - versus 60% for the other 11 months. The Dow's average September return has been minus 1.1%, versus an average gain of 0.8% for the other 11 months. The differences between these averages are significant at the 95% confidence level statisticians often use to assess whether a pattern is genuine.
As these statistics also illustrate, there is no guarantee that the stock market will perform poorly this September. A 40% probability of rising is not zero. And the Dow rose in each of the last two Septembers.
But investing is a matter of probabilities, and the stock market in September has the lowest probability of gain of any throughout the year.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
-Mark Hulbert