That pumpkin spice latte of yours is souring the market on stocks

By Mark Hulbert

Fall in the air can bring falling stock prices

September is shaping up to be particularly sad for the U.S. stock market.

I'm referring to Seasonal Affective Disorder (SAD), which is the depressive mood we often feel with the change of seasons. Researchers have found compelling evidence that SAD is responsible for September being the worst month for average stock market performance. And there's evidence that SAD is hitting investors especially hard this year.

This SAD effect will be counteracting the positive trend of this being a presidential election year. As I pointed out in a recent column, September of a presidential election year historically is not as bad for the stock market as in other years. Except seasonal affective disorder has never started as early as it has this year.

The calendar in August might have said that fall is still several weeks away, but our psyches were already starting to bemoan the end of summer. It doesn't help that many schools and colleges now start their school years in mid-August. Moreover, retailers picked particularly early dates this year to push their fall sales merchandise.

By mid-August, for example, major retailers such as Walmart (WMT) and Home Depot (HD) had fully rolled out their Halloween displays. On Aug. 22, Starbucks (SBUX) started selling that icon of the fall season, the Pumpkin Spice Latte (PSL). In contrast, Starbucks first started selling the PSL on Oct. 10, 2003. MarketWatch reporter Charles Passy reports that by "waiting" until Aug. 22 to begin selling the latte, Starbucks actually could be "too late to the game," since other retailers were selling their version of the PSL as early as July.

Got that summertime sadness

Research shows that such an early focus on the fall months and the reality that relatively carefree summer days are ending often translates into pessimism about the stock market.

Generally, SAD is more prevalent in depth of winter. But what affects the stock market is not the general affliction of SAD but the changes in its incidence. Research shows that the biggest month-to-month changes in the number of SAD sufferers is between August and September, according to an analysis of data compiled by Raymond Lam, professor and leadership chair in depression research at the University of British Columbia.

Perhaps the most prominent study analyzing the relationship between the stock market and those suffering from SAD is entitled "Seasonal Asset Allocation: Evidence from Mutual Fund Flows." It was conducted by Mark Kamstra of Canada's York University, Lisa Kramer of the University of Toronto, Maurice Levi of the University of British Columbia, and Russ Wermers of the University of Maryland. They found that month-to-month changes in those suffering from SAD are correlated with mutual fund inflows and outflows.

Correlation is not necessarily causation, of course. But the researchers went to great lengths to eliminate other possible hypotheses. One of the most telling of their tests came when analyzing mutual funds flows and the incidence of SAD in Australia. Because the country is in the southern hemisphere, it should follow a cycle that is the mirror opposite of the one in the U.S. - and sure enough it does.

To the extent investors' depressive September mood is affected by things like retailers' fall-themed displays in July or August, the stock market should be turning down earlier and earlier each year. To find out if this is the case, I determined for each year the date of the highest August-September close for the Dow Jones Industrial Average DJIA.

For example, in 2003 -when Starbucks introduced its Pumpkin Spice Latte that October - the Dow hit its August-September high on Sept. 18. Last year, when fall-themed displays were widespread in August, the Dow's high registered in early August.

To be sure, the stock market is affected by myriad factors besides when retailers start pushing fall-themed merchandise and when Starbucks starts selling its iconic latte. And there is much year-to-year variation in the dates on which the Dow hits its August-September high. Nevertheless, my PC's statistical software says there is a distinct trend for these dates to occur earlier each year.

After the fall

Investors who focus on the long term don't need to base their strategies on when retailers start displaying fall-themed merchandise, or even on September's well-deserved reputation for being bad for the stock market. But this discussion is still relevant for them, because it shows how our moods can influence the markets.

All of us like to think we are totally objective and data-driven when making investment decisions. But study after study finds that this behavior is honored more in the breach than in the observance. Even something as seemingly irrelevant as when you can buy a spiced latte has meaning.

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

More: 5 market sectors and 9 stocks to keep on your radar in September

Plus: Here are the S&P 500's best-performing stocks in August

-Mark Hulbert

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09-07-24 0942ET

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