How to profit from September stock-market weakness

By Mark Hulbert

Some industries do well in September, despite overall market weakness

September is almost here, and pumpkin spice is not the only thing that is expected to do well this month.

It's possible to exploit September's poor seasonal stock-market odds without going short the market. Instead, you can shift into industries and sectors that historically have done well in September.

That's good news because, even though the stock market is a poor performer during the average September of a midterm-election year, going short is nevertheless risky. Since the Dow Jones Industrial Average was created in the 1890s, it has lost an average of 1.9% in midterm-year Septembers. Yet the DJIA rose in 39% of those months.

The alternative that doesn't involve going short is shifting some of your equity portfolio into sectors of the stock market that nevertheless do well in Septembers of midterm-election years. To determine which sectors those are, I turned to a database containing the monthly returns of 48 industry sectors since 1963, according to data provided by Ken French, professor of finance at Dartmouth's Tuck School of Business.

Only three of those 48 sectors have posted an average gain in midterm-year Septembers. Here they are, along with their average gains in these Septembers:

-- Precious metals: 2.7%

-- Healthcare: 1.5%

-- Defense: 0.2%

Gold's positive September seasonality

A statistical pattern by itself is not a good enough reason to alter your portfolio. You should only invest according to patterns that have a plausible theory for why they should exist in the first place, and I am unaware of any theory for why the healthcare and defense sectors should be some of the strongest performers in September.

Such a theory does exist, however, for the precious-metals sector. Two theories, in fact. Both were proposed in a study published a number of years ago in the academic journal Research in International Business and Finance. The study, titled "The Autumn Effect of Gold," was conducted by Dirk Baur, a finance professor at the University of Western Australia.

The first theory traces back to the same underlying factor that causes the stock market to perform poorly in September: a big uptick in seasonal affective disorder. Baur believes that, just as the depressed mood that results from SAD often leads to a lower stock market, it also often leads to higher gold prices: "Investors purchase gold as an insurance against turmoil in the stock market."

Baur's second theory is that gold performs well in September because of increased jewelry sales in anticipation of Diwali, the annual Hindu festival of lights. This year the holiday begins on Nov. 8.

Perhaps the easiest way to gain exposure to the precious-metals market is via an exchange-traded fund. The one with the most assets under management is the SPDR Gold Shares GLD. For those who are interested in individual precious-metals stocks, here are the three that currently are recommended for purchase by any of the top-performing investment newsletters monitored by my performance-auditing firm:

-- Freeport-McMoRan FCX

-- Newmont NEM

-- Royal Gold RGLD

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

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08-31-26 1650ET