September has developed a notorious reputation among stock investors, particularly in the U.S. This month, which historically yields an average return loss of 0.9% for large-cap stocks since 1926, stands out as the only month with a negative average in a nearly century-long span of market performance. According to data from Morningstar Direct, every other month has produced positive returns on average, setting September apart as an outlier. While February might have the second-lowest average return at just 0.4%, it still outpaces September by more than a percentage point. The superior month of July, boasting nearly a 2% average return, further amplifies September’s underwhelming performance.
Moreover, this negative trend is not merely a relic of the distant past. The S&P 500 index has averaged a 1.7% loss in September since 2000, affirming its position as the worst month historically, overshadowed only by the infamous performance of September over the generations. The phenomenon begs the question: Why does this month consistently bring about such poor performance in equity markets?
Experts like Abby Yoder from J.P. Morgan Private Bank attribute a significant aspect of September’s reputation to investor psychology. The last two weeks of this month are often considered particularly weak, as historical patterns appear to influence current investor behavior. Yoder notes that narratives surrounding market performance tend to create self-reinforcing cycles, where expectations of loss foster further selling pressure. This phenomenon could potentially mimic the psychological effects seen during economic recessions—a narrative that feeds itself, ultimately resulting in a heightened sense of foreboding among market participants.
Another contributing factor may involve the practices of mutual funds. As the fiscal year concludes on October 31, these funds typically lock in gains and losses for tax purposes, a practice known as “tax-loss harvesting.” This tendency might prompt funds to engage in stock liquidation earlier, leading to a drag on prices in September instead of waiting for the year’s end. The blend of psychological factors and strategic financial maneuvers indicates that September’s downturn is as much about perception and anticipated actions as it is about historical trends.
The market’s performance in September presents an intriguing dichotomy. While the average return has been negative, it is crucial to recognize that large-cap stocks in the U.S. have posted positive returns in September in half of the years since 1926. The critical takeaway here is the element of randomness that influences market behavior. For instance, selling stocks based on poor historical performance could mean missing significant gains in what turns out to be a strong September—such as in 2010 when investors who exited the market missed a 9% surge.
Experts warn against attempting to time the market, acknowledging that doing so often leads investors astray. Historical analyses reveal that some of the best trading days for the S&P 500 occurred during recessions, indicating that the relationship between calendar months and stock performance is not as straightforward as conventional wisdom might suggest.
The traditional patterns observed in September can be traced back to historical economic practices related to agriculture and banking in the 19th century. In those days, banks operated under a different structure, often leading to seasonal fluctuations in investment activity. As agricultural practices dictated cash flow trends from rural areas into banks in New York City, speculators often found themselves compelled to sell stocks in September when liquidity became constrained.
However, the establishment of the Federal Reserve in the early 20th century transformed the banking landscape, leading to a more sophisticated economic structure less susceptible to cyclical cash flow issues related to agriculture and seasonality. Researchers like Edward McQuarrie argue that today’s financial models should not necessarily experience the same predictable downturns that characterized earlier eras. The persistence of September’s poor performance in modern times then raises further questions about the impact of psychological elements over historical causality.
In today’s context, various external factors exacerbate the market’s vulnerability to September’s historical weakness. Uncertainties surrounding impending U.S. presidential elections and crucial decisions by the Federal Reserve concerning interest rate policies only heighten anxiety among investors. The intersection of political and economic unease doesn’t bode well for September dynamics, and Yoder emphasizes that uncertainty unsettles investors, causing them to tread cautiously.
Despite prevailing trends, several analysts stress that long-term investors should maintain their positions rather than react impulsively to short-term fluctuations. After all, empirical data suggests that historically, markets recover and grow over longer horizons, debunking the myth of September’s exclusively doom-laden reputation. Engaging with markets requires a perspective that moves beyond the lens of historical averages to understand the unpredictability and opportunities inherent in investing.
While September’s historical performances raise eyebrows, they also challenge investors to think critically about the interconnectedness of psychology, behavior, and market dynamics. A keen understanding of these elements can empower investors to make informed decisions, promoting resilience even in months marked by traditional downturns.