Every seasoned investor knows that September is a month that often brings trepidation when it comes to stock markets. An examination of historical performance highlights a worrying trend: since 1926, U.S. large-cap stocks have recorded an average decline of 0.9% during this typically unremarkable month, according to data from Morningstar Direct. This statistic is particularly disconcerting as September stands out as the solitary month in the calendar that has historically shown an average loss. In contrast, other months such as February yield a modest 0.4% profit, while July emerges as a robust performer with an impressive average return of nearly 2%.
Recent data reinforces this historical trend. The S&P 500, a benchmark for large U.S. stocks, has lost an average of 1.7% in September since the turn of the millennium, marking it as the worst-performing month during that timeframe, as reported by FactSet. When scrutinizing these metrics, it becomes clear that September warrants a more profound investigation as it captures both the attention of investors and analysts alike.
Analysts suggest that the latter half of September is particularly susceptible to downturns. According to Abby Yoder, a U.S. equity strategist at J.P. Morgan Private Bank, the final two weeks of the month typically exhibit substantial weakness. As a result, investors might be tempted to exit the market altogether. However, caution is advised; market timing is often fraught with peril. Financial experts consistently emphasize the futility of attempting to predict market fluctuations, noting the inherent volatility. For instance, an analysis by Wells Fargo reveals that the S&P 500’s ten best trading days over the past thirty years coincided with periods of recession.
Some may take comfort in the fact that large-cap U.S. stocks posted positive returns in September half the time since 1926, indicating that while the statistical trend appears negative, there are periods of positive performance. For example, those who divested from the market in September 2010 missed out on a notable 9% gain, marking it as the best-performing month that year. The lesson here is clear: hasty decisions, motivated by seasonal trends, can rob investors of potential gains.
The Illusion of Trading Rules
Compounding this complexity are common trading maxims such as “sell in May and go away,” which suggests that investors should exit their positions in May and re-enter in November. Such rules often lack empirical support when closely examined. Fidelity Investments has highlighted flaws in this method, demonstrating that stocks tend to claw back losses throughout the year, as shown by a 1.1% average gain in the S&P 500 from May to October—a stark contrast to the 4.8% gain from November to April.
The rationale behind these adages often stems from extrapolating past patterns without adequately considering the changing dynamics of the market. As noted by market analysts, a lack of careful scrutiny can lead investors into blind adherence to flimsy strategies that may not hold up under practical conditions.
The underperformance of September can be linked to various historical factors that have compounded over time. An intriguing aspect of this month’s historically poor performance ties back to the agricultural and banking framework prevalent in the 19th century. During that era, banks in New York heavily relied on deposits that typically surged in the spring as farmers harvested crops, only for those funds to disappear in cash withdrawals come fall. This bank-driven cycle may have triggered stock sell-offs, leading to price declines during this period.
Despite the establishment of the Federal Reserve in the early 20th century, which ostensibly stabilized monetary supply, September’s reputation as a challenging month lingers. Yoder and other analysts suggest that investor psychology might play a crucial role in perpetuating this cycle. Eager media narratives and behavioral tendencies feed into each other, causing self-fulfilling prophecies where market participants anticipate declines and react accordingly.
As this September unfolds, additional uncertainties loom, primarily shaped by economic factors such as variable interest rates and impending political events. With potential Federal Reserve policy changes and the impending presidential election, uncertainty runs high. Typically, markets prefer clarity and predictability, and rising anxiety can exacerbate declines. Yoder asserts this uncertainty might contribute to the monthly pattern of losses.
The ongoing investigation into why September remains consistently turbulent seems to lend itself more to psychology than predictable financial mechanics. Though experts contend that a solid understanding of both historical patterns and psychological dynamics is vital, the singular event that could alter the trajectory of September’s performance remains a question mark.
The unpredictable nature of stock markets, especially during September, underscores the importance of staying informed and prepared. Investors should approach this month with cautious optimism rather than fear, recognizing both historical trends and the complex variables that influence market behavior. Knowledge and strategy, rather than reactionary measures, will ultimately guide investors through this historically rocky period.