Skip to main content
The Globe and Mail
Support Quality Journalism
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); }

Let me say this up front: If interest rates rise, the stock market is in trouble, especially if an economic rebound is not driving the higher interest rates.

Having said this, I do not think the increased volatility in September is the result of markets fearing higher interest rates, nor do I think that economic fundamentals are deteriorating to justify the increased volatility and sharp sell-offs. And I definitely do not believe that traders came back from their vacation and decided to push the sell button just because they are miserable that they are back to work – the popular explanation appearing in the media these days.

This is not the start of a sustained decline, but, in my opinion, a temporary blip – again assuming that the U.S. Federal Reserve will not unjustifiably push interest rates higher. The stock-market declines are not based on deteriorating economic fundamentals.

Story continues below advertisement

While an increase in interest rates will definitely change the fundamental picture and justify sharp stock-market declines, the September rise in volatility has to do more with seasonal factors than fundamental reasons.

In my opinion, portfolio managers – having made a handsome return over the past six months – do not want to risk their Christmas bonus, in light of a likely increase in interest rates, and are rebalancing their portfolios in a predictable way according to the gamesmanship hypothesis that I have described in detail in prior articles in The Globe and Mail and that I'll summarize below.

In the long run, economic fundamentals drive the stock market. In the short run, and definitely within a year, the stock market is driven up or down around the long-term trend by portfolio managers' desire to rebalance their portfolios in order to maximize the chance of getting their Christmas bonus.

September and October, in particular, tend to be the weakest months of the year. Why?

It is because portfolio managers are selling to lock in their Christmas bonus giving returns earned since February, 2016.

That is, to understand the seasonal behaviour of stock prices – and the relative weakness in September and October – you need to understand the factors driving such seasonality.

We normally talk about institutions making investment decisions. This is not true. It is individuals working for institutions who make those decisions. These people have their own psychology, over which they have little control, and their own agendas, which may differ from those of the institutions they work for.

Story continues below advertisement

Professional portfolio managers' own agendas and their efforts to maximize their own benefits lead them to rebalance portfolios (and window dress) in a predictable way throughout the year.

The high returns on risky securities around the turn of the year are caused by systematic shifts in the portfolio holdings of professional portfolio managers who rebalance their portfolios to affect performance-based remuneration (that is, their Christmas bonus).

Institutional investors are net buyers of risky securities around the turn of the year when they are motivated to include lesser-known, higher-risk securities in their portfolios and are trying to outperform benchmarks.

Later on in the year, portfolio managers (as they rebalance their portfolios) divest from lesser-known, risky stocks and replace them with well-known and less risky stocks or risk-free securities, such as government bonds.

Toward the last few months of the year, they switch to stocks or securities they perceive to be less risky and more glamorous and in so doing they spruce up their portfolios (that is, window dress) and, at the same time, lock in returns.

The excess demand or supply for risky stocks throughout the year bids the prices of these securities up or down.

Story continues below advertisement

Moreover, as portfolio managers are exposed to the human behaviour of herding, they tend to move in tandem when they decide to buy or sell stocks; their effect on stock prices is pervasive and powerful, leading, on average, to the seasonal strength of stocks in November to April and weakness in May to October, particularly in September and October.

Portfolio managers are now selling trying to lock in their Christmas-bonus-giving returns.

If this is the case then there is nothing to worry about. In fact, sharp sell-offs in September and possibly October could provide good investment opportunities for well-financed investors. The seasonal increase in volatility and market weakness will reverse themselves when the rebalancing is over in a couple of months, again assuming that interest rates will not unjustifiably increase.

George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, University of Western Ontario.

Report an error
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies