As the summer fades, and we slowly shift into the pumpkin and apple picking season, September marks the beginning of fall. For investors, September has been a month of unease as it is the worst performing month for the S&P 500 and delivers negative returns more often than any other month.[1] This phenomenon, commonly known as the “September Effect,” raises questions about whether its causes are rooted in seasonal factors, investor psychology, or deeper economic factors. Let’s explore the driving forces behind this market anomaly and what insights can be drawn from it.
Starting with the history, since 1928:
- September is the only month in the calendar year to deliver both negative average and median returns across all major U.S. indices. (Seen in the chart below).[2]
- The S&P 500 declined 56% of the time during the month of September.[3]
The “September Effect” is not an absolute certainty. In fact, in some years, this month’s return is positive (approximately 44% of the time). Put into perspective, the occurrence of this effect is only slightly worse than a coin flip. Despite this, the trend is still noticeable enough to warrant attention. While there is not a simple nor definite answer to explain this anomaly, there are some theories as to why it occurs.
· Back to work: The summer months are characterized by vacations and reduced trading activity from June to August, as investors are out of the office. When they return, trading activity gains traction, portfolios get rebalanced, and stock holdings get reassessed. This influx of activity can heighten market volatility and can lead to lower returns.
· Tax reasons: Many mutual fund companies end their fiscal year in September, which can prompt tax-loss harvesting. This could lead to more selling pressure and further contribute to historically lower September returns.[4]
While these offer some potential explanations of the “September Effect,” it’s most likely a combination of those factors as well as some form of randomness. It is also interesting to note that while September is historically weak, the following quarter (October through December) is the seasonally strongest time of the year.[5]
Thus far in 2024, the “September Effect” has held true as the S&P 500 is down 2.71% month to date (as of 9/10/24). This month the weakness has been attributed to economic data, specifically jobs, that have been slightly weaker than expected. Also, there has been volatility surrounding U.S. Federal Reserve actions and commentary for their upcoming meeting on 9/18/24.
At Gradient Investments, we would consider the “September Effect” as more of a market anomaly than a prediction tool. We think it is important to put such patterns in context and be aware that this data is backward-looking and is an oversimplified approach to investing. Taking a wider lens to put this higher volatility month in perspective, the S&P 500 is still experiencing double-digit returns year to date (as of 9/10/2024). It is important to remember that corrections happen every year, in down as well as in up years. The chart below[6] shows the deepest decline in a given year (gray bar) along with the end-of-year performance (red bar).
The data shows that, even in strong years, markets experience corrections and declines can happen at any time of the year. Seasonal trends, while interesting, are not fundamental approaches to investing and should not be considered part of long-term investment plans. Using these anomalies as timing signals for buying and selling often distracts from the true process of investing and can often detract, rather than enhance, long-term returns.
Posted here on Sep 12, 2024 by Lisa Schreiber
1,[2] https://www.barrons.com/articles/stock-market-september-7dba8f98
[3] https://www.wsj.com/finance/stocks/september-is-once-again-a-tough-month-for-stocks-8392fe0a
[4] https://www.cmegroup.com/openmarkets/equity-index/2023/three-reasons-for-the-September-Effect-in-stocks.html
[5] https://www.barrons.com/livecoverage/stock-market-today-090324/card/september-lives-up-to-its-reputation-for-the-stock-market-at-least-for-1-day-1HV6ZjFveNURTmsznvWN
[6] FactSet as of 9/9/2024