Tuesday’s market jitters were brought on by stocks slumping to begin what has traditionally been Wall Street’s worst month.
The September Effect is the historical underperformance of the stock market in September. The market has not performed as well in September as it has in the previous ten, twenty, and fifteen years.
The Chief Market Strategist at Carson Group, an advisory firm, Ryan Detrick says. It’s also the month since 1925 that Fisher Investments claims has an average negative return of -0.78%.
Why Does the September Effect Impact Stocks?
Here’s What You Need to Know…
Several types of theories can explain this historical pattern. According to one theory, traders rebalance their portfolios in September after coming back to work from holidays during the summer, which drives up selling volume and drives down stock prices.
According to a different theory, bond offerings increase in September as the summer holidays end. The money raised by these bond sales would have otherwise supported stock prices. One more places the blame on mutual funds, which have fiscal years that normally conclude on October 31. The theory states that in the last few months of their fiscal year, funds end up being in positions that are tax-losing.
These are not all comprehensive justifications. The impact of summer vacations on stocks has been somewhat mitigated by algorithmic trading and work mobility in the smartphone age, even though trading activity tends to decline during the busiest travel months.
Furthermore, studies reveal that mutual funds typically anticipate the pressure on prices from seasonal selling and make adjustments in response.
Why September’s Stock Market Struggles Are More Than Just a Few Bad Months
September’s unfavorable reputation seems to result more from a few bad years than from a particular cause. The S&P 500 saw its largest monthly loss during the Great Financial Crisis in September 1931, when it dropped 29.6% of its value. 2008 saw yet another terrible September as the index dropped by almost 9% due to the failure of Lehman Brothers.
There are many reasons to remain in the market given the unusual nature of September returns. September has seen a slight increase in stocks slightly frequently compared to a decrease in them throughout the past century (51% vs. 49%), so missing the month of September is hardly guaranteed successful outcomes.
According to Fisher Investments, September’s median return, which accounts for both the positive and negative outliers, is exactly 0% over the previous 98 years.
How the September Effect Shifts in Election Years: What Investors Should Know
The biggest elephant (and donkey) in a room this year for investors worried about September could be the impending presidential election. Stocks may be affected by the uncertainty surrounding its outcome for the remainder of October.
But historically speaking, September has not seen a decline in stocks during presidential elections. Before a presidential election, stocks have increased in almost three quarters (62.5%) of September (15 of the 24 presidential elections since 1925). That is significantly better compared to the average for the entire month and only 1% below the monthly average. In years with presidential elections, September’s median return is 0.3%.
That being said, opinions regarding the state of economic conditions and investor expectations drive market reactions every day rather than past trends. The way that investors view this particular election cycle and the potential effects of each candidate’s financial proposals could have an impact on the performance of stocks this month.
There are many other unknowns surrounding the election. Much more likely to influence stock market activity this month than the notion of a September Effect are the state of the labor market, inflation, and the Federal Reserve’s upcoming actions.
