Tuesday, June 26, 2012

Take the Summer Off


Earlier this year, after the stock market posted very strong results for the first quarter (up over +12% for the S&P 500), a number of pundits suggested that the most prudent approach at that point was to "Sell in May, and Go Away".

It's too early to tell whether this advice was correct - although the market has fallen by about -5% since the end of March - but there may be another reason for caution heading into the fall.

Yesterday's Free Exchange blog (courtesy of the Economist magazine) discussed  the work of economists Luc Laeven and Fabian Valencia, who both work at the International Monetary Fund. 

The two examined 147 banking crises dating from 1970, and found that September is typically the month in which most banking crises occurred. 

As the chart above indicates, the most dangerous times in the banking sector tend to occur in early fall. Why this is so is not clear, but the authors are not particularly cheery when they describe what happens:
In terms of the real effects of banking crises, we find that advanced economies tend to experience larger output losses and increases in public debt than emerging and developing countries. These larger output losses in advanced economies are to some extent driven by deeper banking systems, which makes a banking crisis more disruptive....


If history is any guide, then, the best advice for the summer might be to rest!