Finance

Here’s why September and October are historically weak for stocks

Published

2 months ago

September 11, 2024

José Luis Gutiérrez | iStock Photo

Why are September and October historically weak for stocks? For answers, I turned to Mark Higgins, senior vice president at Index Fund Advisors and author of the book, Investing in U.S. Financial History: Understanding the Past to Forecast the Future.

The answers have been edited for clarity.

What is it with September and October being weak months for stocks? Has this always been the case?

Yes. The most intense panics on Wall Street have tended to occur during the late summer and early autumn months. This can be traced all the way back to the 1800s. A few notable examples of exceptional panics include Black Friday of 1869, the Panic of 1873 and the Panic of 1907.

But why September and October?

It is a byproduct of an old weakness in the U.S. financial system. Prior to the reintroduction of a central banking system with the passage of the Federal Reserve Act of 1913, the U.S. was limited in its ability to adjust the money supply in response to market conditions.

The inelasticity of the U.S. currency made the late summer and early autumn months an especially precarious time, due to the agricultural financing cycle. In the 1800s, the U.S. economy still relied heavily on agricultural production. For the first eight months of the year, American farmers had a limited need for capital, so excess funds held on deposit in state banks were shipped to New York banks or trust companies to earn a higher rate of return.

When harvest time arrived in August, state banks began withdrawing their capital from New York, as farmers drew on their accounts to fund transactions required to ship crops to market.

The agricultural financing cycle created chronic shortages of cash in New York City during the autumn months. If these shortages happened to coincide with a financial shock, there was little flexibility in the system to prevent a panic.

How did the government respond to these panics?

The limited ability of the government to react was the primary impetus for the passage of the Federal Reserve Act of 1913. The Act granted the Fed the power to serve as a lender of last resort during financial crises. Prior to the Act, leading financiers (most notably J.P. Morgan) were forced to assemble ad hoc solutions that relied primarily on private capital. After the U.S. barely avoided a catastrophic collapse of the financial system during the Panic of 1907, there was just enough political support for the return of the third and final iteration of a central banking system in the United States.

Did the creation of the Federal Reserve provide more stability to markets?

Yes, and if one compares the frequency, intensity and misery of financial panics during the 1800s, this is plainly evident. In fairness, the Fed made a few mistakes along the way, with the most notable being its failure to stop the contagion of bank failures in the 1930s. But, by and large, the U.S. financial system has been much more stable since the Federal Reserve became operational in late 1914.

Still, the U.S. economy is not primarily agricultural anymore. Why are September and October still weak months?

People tend to fear things that have happened before even if they don’t remember the origin of the fear. It may be that the fall panics have repeated so many times that they have become a self-fulfilling prophecy. In other words, people expect them, and because they expect them, they behave in ways (i.e., reducing risk in late summer and early fall) that make them more likely. I know this sounds like a stretch, but it does seem like it may actually be real.

Finance

Visa & Mastercard execs grilled by senators on high swipe fees

Published

5 hours ago

November 19, 2024

Business Finance News

The Senate Judiciary Committee convened on Tuesday for a hearing on the alleged Visa–Mastercard “duopoly,” which committee members from both sides of the aisle say has left retailers and other small businesses with no ability to negotiate interchange fees on credit card transactions.

“This is an odd grouping. The most conservative and the most liberal members happen to agree that we have to do something about this situation,” committee chair and Democratic Illinois Sen. Dick Durbin said.

Interchange fees, also known as swipe fees, are paid from a merchant’s bank account to the cardholder’s bank, whenever a customer uses a credit card in a retail purchase. Visa and Mastercard have a combined market cap of more than $1 trillion, and control 80% of the market.

“In 2023 alone, Visa and Mastercard charged merchants more than $100 billion in credit card fees, mostly in the form of interchange fees,” Durbin told the committee.

Durbin, along with Republican Kansas Sen. Roger Marshall, have co-sponsored the bipartisan Credit Card Competition Act, which takes aim at Visa and Mastercard’s market dominance by requiring banks with more than $100 billion in assets to offer at least one other payment network on their cards, besides Visa and Mastercard.

“This way, small businesses would finally have a real choice: they can route credit card transactions on the Visa or Mastercard network and continue to pay interchange fees that often rank as their second or biggest expense, or they could select a lower cost alternative,” Durbin told the committee.

Visa and Mastercard, however, stand by their swipe fees.

“We consider them incentives, some people might consider them penalties. But if you can adopt new technology that reduces the risk and takes fraud out of the system and improves streamlined processing, then you would qualify for lower interchange rates,” said Bill Sheedy, senior advisor to Visa CEO Ryan McInerney. “It’s very expensive to issue a product and to provide payment guarantee and online customer service, zero liability. All of those things, and many more, senator, get factored into interchange [fees].”

The executives also warned against the Credit Card Competition Act, with Sheedy claiming that it “would remove consumer control over their own payment decisions, reduce competition, impose technology sharing mandates and pick winners and losers by favoring certain competitors over others.”

“Why do we know this? Because we’ve seen it before,” Mastercard President of Americas Linda Kirkpatrick said, in reference to the Durbin amendment to the 2010 Dodd-Frank Act, which required the Fed to limit fees on retailers for transactions using debit cards. “Since debit regulation took hold, debit rewards were eliminated, fees went up, access to capital diminished, and competition was stifled.”

But the current high credit card swipe fees for retailers translate to higher prices for consumers, the National Retail Federation told the committee in a letter ahead of the hearing. The Credit Card Competition Act, the retail industry’s largest trade association wrote, will deliver “fairness and transparency to the payment system and relief to American business and consumers.”

“When we think of consumer spending, credit card swipe fees are not the first thing that comes to mind, yet those fees are a surprisingly large part of consumer spending,” Notre Dame University law professor Roger Alford said. “Last year, the average American spent $1,100 in swipe fees, more than they spent on pets, coffee or alcohol.”

Visa and Mastercard agreed to a $30 billion settlement in March meant to reduce their swipe fees by four basis points for three years, but a federal judge rejected the settlement in June, saying they could afford to pay more.

Visa is also battling a Justice Department lawsuit filed in September. The payment network is accused of maintaining an illegal monopoly over debit card payment networks, which has affected “the price of nearly everything,” according to Attorney General Merrick Garland.