Media is in full force declaring September as the worst month for US stocks. And it doesn’t help when the markets have a 3-day break, including weekends and Labor Day, giving the media plenty of time to spook investors. For all we know, the first trading day in September may see a mass selloff as fearful investors exit.
Here’s a snapshot of the media headlines from these past few days:
What are the reasons that make September a bad month for stocks?
There are, of course, reasons often concocted after the fact, but no one knows for sure what the actual causes are. Some common theories include the end of summer, where trading volumes pick up as investors and traders return from vacations and start repositioning their portfolios simultaneously, causing more volatility in the markets.
Additionally, mutual funds in the U.S. have their fiscal year ending in October. Fund managers might begin offloading loss-making investments in September to realize losses for tax purposes, which could contribute to market declines.
Lastly, several macro events in recent Septembers may have negatively affected market sentiment:
- September 2020: COVID-19 remained a significant concern, with vaccines still in development and not yet rolled out. There was a sell-off in tech stocks, including the “Magnificent 7.” Additionally, it was a U.S. presidential election year, adding uncertainty as Trump sought reelection against Biden.
- September 2021: The spread of the Delta variant raised fears of renewed lockdowns, potentially stalling economic recovery. There were growing expectations that the Federal Reserve would begin tapering its asset purchases, leading to concerns about reduced liquidity and higher interest rates. The U.S. also faced a potential government shutdown and default due to debt ceiling issues.
- September 2022: Inflation dominated headlines, and investors were worried about aggressive Fed rate hikes. The Fed raised interest rates by 75 basis points in September, signaling more tightening. Europe was grappling with the energy crisis stemming from the Russia-Ukraine conflict, as disruptions in Russian natural gas supply led to higher energy costs.
- September 2023: Concerns about “higher for longer” interest rates persisted, with no signs of the Fed cutting rates, raising fears of an economic slowdown and potential recession. The U.S. government faced another risk of shutdown over budget disputes in Congress.
Now, at the start of September 2024, what potential macro events could affect the stock market?
The first major event to watch is the anticipated rate cut. It seems almost certain that a rate cut will occur, but the debate is whether it will be a 25 or 50 basis point cut. Historically, stocks often fall during the initial phase of a rate cut cycle because rate cuts are usually a response to an economic slowdown. However, this time, the U.S. economy appears strong, and the Fed might be cutting rates proactively to ensure a soft landing. Key economic indicators, such as the ISM Services PMI and unemployment rate, are due for release in the first week of September and could provide signs of economic slowdown, influencing market direction.
What does the data say about September stock returns?
You might have seen many charts showing that September has historically delivered the lowest returns among all months, and some data even suggest that these poor returns have worsened in recent years. This trend could be amplified by the widespread distribution of such information through social media, creating a self-fulfilling prophecy where more investors decide to sell off stocks in September, anticipating declines.
This bearish trend is not limited to U.S. stocks alone. Globally, stocks have also tended to perform poorly in September. This is not entirely surprising, considering that many international stock markets often take their cue from the U.S. markets. When something spooks U.S. investors, it typically has a ripple effect, causing anxiety among investors worldwide.
However, it’s important to note that some statistics indicate that Septembers during U.S. presidential election years have historically been less bearish, even showing modest gains on average. This year is a presidential election year as well, which could mean that the historical pattern might not hold as strongly, potentially leading to less bearish or even positive returns for September.
So, how do we act on such data?
While it appears that average returns in September are typically poor, this doesn’t mean that every September yields negative returns. For long-term investors, these monthly fluctuations are often less concerning.
For example, you might consider selling your S&P 500 ETF in August to avoid poor September returns and then buy back at the end of September, effectively skipping September each year. However, this strategy might not be as beneficial as it sounds. In fact, it could result in worse performance compared to a buy-and-hold investor who holds through every month. This is exactly what Dave Haviland, Portfolio Manager and Managing Partner at Beaumont Capital Management, found. His research suggests that long-term investors are better off ignoring the media’s September scare.
Another important point is that these returns are typically calculated based on indices, which represent a basket of stocks. Since these indices are average measures, there will likely be individual stocks that perform well in September even when the overall index does not. For stock pickers, this means potentially missing out on gains if they sell off in anticipation of a poor month and their chosen stocks perform well.
Lastly, the so-called “September effect” may hold more relevance for traders focused on market timing. Even then, the impact varies depending on the trading strategy. September is known for volatility, so strategies like day trading or mean reversion that thrive on market swings might perform better, while trend-following strategies may face larger drops or whipsaws. However, switching trading strategies just for one month isn’t advisable. Few traders can excel at multiple strategies, so it’s often better to stick to a consistent style and manage risk accordingly—perhaps by reducing position sizes during periods of anticipated volatility.
In summary, while September’s historical performance data might seem alarming, acting solely on these trends could lead to suboptimal decisions. Long-term investors would benefit more from staying the course and avoiding short-term market timing based on seasonal trends. For traders, sticking to their tried-and-tested strategies and adjusting risk management might be the more prudent approach.
