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The September Swoon: A Cautionary Tale for Australian Shareholders
Australian shares have recently surged, touching the milestone of 9,000 points despite a backdrop of cautioning factors: inflated historical valuations, apprehensions over global trade, sluggish commodity prices, and a waning Chinese economy. For the seasoned market observer, such exuberance typically precedes a downturn, particularly as we enter September, known for its historically poor market performance.
Understanding Market Seasonality
Seasonality in finance refers to recurring patterns observed in market returns linked to specific calendar periods. While many are familiar with the cyclical tendencies in agricultural markets, they also exist in equities. Factors like corporate reporting timelines and periodic dividend cycles can influence stock performance.
Recognising these patterns is essential; however, it’s imperative to note that they do not predict future outcomes—rather, they indicate what we might expect based on historical behaviour. Seasonal trends should be considered a tool for evaluating market dynamics, particularly during periods of extreme market sentiment.
Focus on the All Ordinaries Index
The All Ordinaries Total Return Index (XAOA) is our primary focus. This broader index, encompassing approximately 500 stocks, provides a more representative view of the Australian stock market than the more commonly referenced S&P/ASX 200. The significance of the “total return” aspect is that it includes reinvested dividends, offering a clearer picture of overall market performance.
To assess seasonal trends accurately, only total-return indices should be employed. Excluding dividends can distort perceptions of performance during periods of volatility.
An Examination of September
Analysing the XAOA over the last 40 years reveals that September is statistically the weakest month for Australian shares, with an average return of -0.11%. Although this modest decline doesn’t spell disaster, it sets September apart from the other months, which predominantly show positive returns.
Additionally, September has the lowest reliability for gains, with only 52.5% of years witnessing positive returns. This indicates that even when the market typically rises, September often underperforms.
Several factors could explain this anomaly: post-August reporting fatigue, dividend collection strategies, or possibly investor reactions as markets adjust from the positive trends of July and August. Historically, several significant market downturns have also originated in September, further emphasising its reputation.
Weekly Patterns and Looking Ahead
Delving into weekly performance offers another layer of understanding. Historically, September has low reliability and begins a stretch marked by heightened volatility and potential downturns leading into October—traditionally a month that has seen major market corrections.
As we approach the last week of August, noted patterns indicate that from week 36 onwards, increased volatility is typical. This upcoming period could be marked by substantial fluctuations, including some of the worst weeks seen throughout the year.
Conclusion: Prepare for Volatility
This analysis underscores the importance of awareness as we move deeper into September. Historical data suggests that this could be a high-risk period for investors, signalling the potential for challenges ahead.
In closing, understanding seasonal trends equips investors with insight into probable market behaviours. As we navigate the coming weeks, keen attention to historical patterns might offer vital clues. The advice remains: learn from the past to avoid repeating its pitfalls. With today potentially being as good as it gets for the Australian market for a while, prudent investors should approach with caution.
