What is the "September Effect"?
What is the “September Effect”?
The term "September Effect" refers to the historical tendency for the stock market, particularly the S&P 500 index, to perform poorly during the month of September. Of course, historical patterns do not guarantee future performance, but this trend has been a very strong pattern for nearly 80 years. According to CFRA Research, the S&P 500 and its previous index have lost an average of nearly 0.75% since 1945.
Interestingly, this pattern has also started to form in cryptocurrency markets as well. Bitcoin has fallen dramatically in six straight Septembers.
Historical Stock Returns by Month
Source- CRFA Research, Historical Stock Returns by Month
What factors make September a poor month for the stock market?
There are several ideas have been proposed to explain why September has often been a challenging month for the stock market:
Seasonal Factors: Some industry experts believe that September tends to be a weak month for stocks due to seasonal factors. It is often seen as a time when investors return from summer vacations and reassess their portfolios. This can lead to increased trading activity and potentially more selling pressure. Professional mutual fund managers have historically ended their financial year in October, which means they sell losing assets and rebalance in September, with the hope they can gain some better performance in the following months.
Profit-Taking: Short-term swing traders and fund managers who have seen gains in the first part of the year may decide to take profits in September, leading to selling pressure. This profit-taking can be driven by tax considerations, as investors may want to lock in gains before the end of the tax year.
Historical Events: Some significant historical events, such as the 1929 and 2008 financial crises, occurred in September. These events have contributed to the perception that September is an unfavorable month for the stock market.
Self-Fulfilling Prophecy: The pattern that September is such a poor month for stocks is so entrenched in the financial industry, that people “skip it” and sell assets, driving prices down.
Economic and Political Uncertainty: September often marks the end of the fiscal year for many companies and governments. This can lead to uncertainty as budget decisions are made, and this uncertainty can affect investor sentiment.
Lower Trading Volume: During the late summer months, trading volume tends to be lower as many investors take vacations. When trading volume is low, it can lead to increased market volatility and potentially larger price swings.
Should I sell my stock every September?
I believe it is important to emphasize that while these historical patterns exist, they do not always hold true, and there have been many exceptions over the years! Market performance can be influenced by a wide range of factors, including economic data, corporate earnings reports, geopolitical events, and central bank policies.
Investors should approach the stock market with a long-term perspective and diversify their portfolios to reduce risk. Making investment decisions based solely on historical patterns, like the September Effect, is risky and generally not advised. Even if there is poor performance most Septembers, trying to get the correct timing of buying and selling is difficult and unpredictable and not something I would recommend for most long-term investors.