As the market enters September, investors brace for what is historically the most difficult month of the year for equities. With a legacy of poor performance and heightened volatility, September often disrupts the market's momentum, raising concerns that this year may be no different.
Adam Turnquist, chief technical strategist for LPL Financial, notes that “seasonal weakness in September could spoil the momentum” built earlier in the year.
Since 1950, the S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), has generated an average return of -0.7% in September, finishing higher only 43% of the time. These statistics make September the worst month for stocks, both in terms of average returns and positivity rate.
The past four Septembers have been particularly tough, with the S&P 500 posting declines of 4.9% in 2022, 9.3% in 2021, 4.8% in 2020, and 3.9% in 2019.
Turnquist explains that the index typically trades sideways during the first half, with losses beginning to accumulate as the month progresses. This year, the mid-September period coincides with the Federal Open Market Committee (FOMC) meeting on September 18, which could further influence market direction.
At the sector level, certain industries have historically shown resilience in September. Turnquist points out, “Sectors like communication services, energy, and healthcare offer a glimmer of hope,” as these sectors have seen slight average gains of 0.1% to 0.2% since 1990. However, materials and real estate have consistently underperformed during September, with average losses of 2.2% and 2.0%, respectively.
September's Challenging Performance
Veteran market strategist Ed Yardeni emphasizes that “September has a history of being the worst month of the year for the stock market.”
While it might seem difficult to envision a significantly bad month this year, given the Federal Reserve’s expected easing cycle starting on September 18 with a 25 basis point cut in the federal funds rate, Yardeni remains cautious. The FOMC is also set to release its latest Summary of Economic Projections, which is likely to confirm further rate cuts in the coming months.
Yardeni highlights that the S&P 500 is already up 18.4% year-to-date, indicating that much of the good news might be priced in.
“It's certainly too early to discount a bearish political outcome on November 5,” he warns, especially if either political party secures a sweep in the upcoming elections, as the market tends to favor political gridlock. Nevertheless, Yardeni acknowledges that the market has historically performed well regardless of which party is in power.
The “September Effect”
Wedbush Securities analysts draw attention to the “September Effect,” a term that refers to the historically poor performance of markets during this month, a trend that spans nearly a century.
“The month of September has been a rough month for the stock market over time,” they note, with the S&P 500 recording gains in only 42 out of the last 95 years, while posting losses in 53 of those years. During the up months, the average gain was 3.19%, but during down months, the average loss was a steeper 4.70%.
“This year, September could be even more unpredictable,” the analysts caution, pointing to the dual pressures of potential Federal Reserve rate cuts and the volatility typically seen in presidential election years. The extent and direction of this volatility remain uncertain, adding to the market's unpredictability.
September’s Unfavorable Seasonality
Bank of America's analysis reinforces September's reputation as the weakest month in terms of seasonality.
“September has the weakest seasonality of all 12 months of the year,” the analyst Stephen Suttmeier, CFA, CMT observes, with the S&P 500 rising only 44% of the time and averaging a return of -1.20%.
The outlook is even more concerning during presidential election years, with September and October delivering average returns of -0.46% and -0.34%, respectively.
“Timing is everything, and September’s timing could not be worse,” Bank of America’s Suttmeier remarks.
Bank of America also notes that the first ten days of September are typically weak, but the last ten days are the most challenging, making it the weakest period of the entire year.
In presidential election years, the market tends to struggle from late August through mid-October, before rebounding strongly in November and December.
S&P 500’s Historical Performance In September
| Period | Average Return | Median Return | Percentage of Time Up | Standard Deviation | Minimum | Maximum | Observations |
|---|---|---|---|---|---|---|---|
| First 10 days September | -0.36% | -0.19% | 43.75% | 4.23% | -14.80% | 16.91% | 96 |
| Last 10 days September | -1.13% | -0.69% | 39.58% | 3.63% | -17.85% | 7.20% | 96 |
S&P 500 in Presidential Years: How the Market Historically Fares from September to Year-End
| Period | Average Return | Median Return | Percentage of Time Up | Standard Deviation | Minimum | Maximum | Observations |
|---|---|---|---|---|---|---|---|
| First 10 days September | -0.42% | -0.38% | 45.83% | 3.26% | -8.70% | 4.91% | 24 |
| Last 10 days September | -0.05% | -0.05% | 45.83% | 2.31% | -3.94% | 6.74% | 24 |
| First 10 days October | -0.60% | -0.06% | 50.00% | 4.93% | -14.43% | 5.25% | 24 |
| Last 10 days October | 0.448% | 0.507% | 58.333% | 2.53% | -6.14% | 5.88% | 24 |
| First 10 days November | 1.06% | 1.36% | 62.50% | 4.72% | -9.85% | 9.64% | 24 |
| Last 10 days November | 0.02% | 0.93% | 58.33% | 3.86% | -11.84% | 5.43% | 24 |
| First 10 days December | 0.48% | 0.92% | 66.67% | 3.44% | -8.03% | 8.70% | 24 |
| Last 10 days December | 0.95% | 0.93% | 62.50% | 2.29% | -3.46% | 8.08% | 24 |
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