Can summer holiday blues cause market crashes?

Why do summer holidays cause market plunges?It’s a trend that’s been noted through the years and has been called the “September effect” that inevitably sees stock markets take a plunge in the Autumn. Stocks drop and bonds rise as panic spreads throughout the financial world as if from nowhere.

According to a Wall Street Journal analysis, September is the only month that shows average declines over the 20, 50 and 100 years.

But what is the cause of this?

A professor at the Massachusetts Institute of Technology (MIT) has taken it upon herself to crunch the numbers and cast her investigative eye over this problem. Professor Lily Fang doesn't hold back the punches either, and blames summer holidays as the reason why autumn frequently spells disaster for shares.

We can’t say we’re surprised either, as I’m sure we all know the effect an upcoming summer holiday can have, and the feeling you get when you return to the office. It’s a reward for all the long hours we’ve worked and deservedly so, especially when you take into account the amount of time those in the financial industry put in.

Everyone knows that in the run up to your holiday, you’re likely to do less work as the anticipation gets you so excited you are barely able to contain yourself. Then, whilst you’re on holiday, you tend to try and forget about work and relax, leaving those emails to be read “later”.

The nitty gritty details

That’s all well and good, but technically it doesn’t explain much. However, if you think about it, trading volumes in August are usually some of the lowest of the year. Therefore, the negative news mounts up until traders return from holiday, en masse.

“The lower returns are exacerbated in September because during the long-duration school holiday that precedes it—summer—professional investors are collectively less focused on news and as a result, information is incorporated into stock prices more slowly,” said Prof. Lily Fang.

“This means that news released during the holidays gets incorporated into prices more slowly than other times. And after holidays, we see that delayed reaction. It is on average negative because bad news travels slowly. It is more difficult, and requires even more attention, to take advantage of bad news than good news,” she added.

Traders aren't superhuman

It highlights that markets are a product of human psychology and are therefore prone to the limitations of people, such as limited attention spans and the need for relaxing holidays.

“The main lesson here is that attention is a limited resource,” said Prof. Fang.

“We make the unrealistic assumption that since traders are professional investors, they are super machines with infinite attention spans. But the fact is: human beings are human beings,” she explained.