Is September the worst month for Investing?
The financial media is full of references to a specific week, month, or year that typically provide bullish or bearish conditions. History indicates that the market usually performs at its worst during the month of September. Some analysts have pointed out that, on average, September is the month when the stock market’s three leading indexes – based in the US - usually perform the poorest. Some have dubbed this annual drop-off as the “September Effect.”
What is the September effect?
Understanding the September Effect
Starting with 1950, the month of September has seen an average decline in the Dow Jones Industrial Average (DJIA) of 0.8%, while the S&P 500 has averaged a 0.5% decline during September.
Though the Nasdaq was established in 1971, its composite index has fallen an average of 0.5% during September trading. This is an average exhibited over many years, and September is certainly not the worst month of stock-market trading every year.
The Russell 2000 is – a collection of small-cap stocks - declined by an average of 0.43% each September dating back to 1979.
The September Effect is a market anomaly and not related to any particular market event or news. In fact, in recent years, the effect has dissipated. Over the past 25 years, for the S&P 500, the average monthly return for September is approximately -0.4%, while the median monthly return is positive. In addition, frequent large declines have not occurred in September as often as they did before 1990. One explanation is that investors have reacted by “pre-positioning”—that is, selling stock in August.
Explaining the September Effect
The September effect is associated with most worldwide markets and is not limited to U.S. stocks. Some analysts consider that the negative effect on markets is attributable to seasonal behavioral bias as investors change their portfolios at the end of summer to cash in.
One reason could be that most mutual funds cash in their holdings to harvest tax losses. Yet another theory points to the fact the summer months usually have lightly traded volumes, as a good number of investors usually take vacation time and refrain from actively trading their portfolios during this downtime. Once the fall season begins and these vacationing investors return to work, they exit positions they had been planning on selling. When this occurs, the market experiences increased selling pressure and, thus, an overall decline.
Additionally, many mutual funds experience their fiscal year-end in September. Mutual fund managers, on average, typically sell losing positions before year-end, and this trend is another possible explanation for the market’s poor performance during September.
How You Should Plan for September
There’s no reason to change your long-term strategy just because of a quirk of the calendar. While the stock market tends to decline in September, around 45% of the time it has gained in the month, including in 2018 and 2019.
And regardless of what comes this September, remember that a good long-term investment strategy has these peaks and valleys in mind. In fact, dollar-cost averaging counts on the market’s natural volatility to get you a lower average cost per share of your investment over time. What’s more, the market’s average September decrease is less than 1%. That means even if we experience a typical September market dip, you probably shouldn’t brace for an all-out freefall, just perhaps a slowdown.
Nonetheless, it’s important to remind yourself about September’s proclivities, especially if you’re inclined to day-trading on Robinhood. Stocks don’t only go up; they also fall. This is the risk of being an investor, and you should face it with a stiff upper lip.