September Arrives With Its Infamous Reputation as the Worst Month for Stocks

Photo by Chris Liverani on Unsplash

The popular quote, “The British are coming,” seems to capture the mood of most investors at the onset of September. The ninth month of the year is traditionally regarded as the worst month for generating returns in the stock market. According to the “Stock Trader’s Almanac,” on average, September turns out to be the month where the three leading indexes in the stock market routinely perform poorest—with some designating the regular occurrence as the “September Effect.”

According to data from Fundstrat, the month of September has generated an average return of -0.1% and a win-ratio of just 46% in the stock market for nearly a century. Meanwhile, the Dow Jones Industrial Average has averaged a decline of 0.8% since 1950, with the S&P 500 averaging a 0.5% decline within the same period. In particular, September 2020 saw the S&P 500 slide by almost 4%.

However, stocks rounded out one of their strongest ever August performances on Tuesday, putting the S&P 500 on course for setting the largest number of closing highs on record. Moreover, reports indicate that the market gained slightly on Wednesday, coming off the back of seven months of consecutive gains and starting the month on an optimistic note.

Notwithstanding, Ryan Detrick—the Chief Market Strategist for LPL Financial—cites the need for wariness regarding the current market trend, noting that September has a pattern of throwing a spanner in the works. “Although this bull market has laughed at nearly all the worry signs in 2021, let’s not forget that September is historically the worst month of the year for stocks,” he stated. “Even last year, in the face of a huge rally off the March 2020 lows, we saw a nearly 10% correction in the middle of September.”

In addition, there is still the dark cloud of the COVID-19 pandemic hanging over the populace as the delta variant continues to rampage. Amid the general feeling that the Federal and State governments would attempt to avoid another cycle of strict lockdowns, ongoing concerns that the government could put an end to the pandemic monetary stimulus or taper its bond purchase program means that all eyes will be on the Federal Reserve policy meeting later this month.

As a result, even the current record highs of the S&P 500 might not be enough to allay investor’s fears, and the general disposition remains cautionary. Some analysts had attributed the negative trend to seasonal behavioral bias as investors look to offload underperforming portfolios before the commencement of the last quarter—timed to cash in at the end of summer.

All things considered, there is a crop of investors that believe September presents a terrific buying opportunity, opting to play the long game rather than attempt to time the market. According to Benzinga, “Last year’s 10% S&P 500 September pullback was an excellent buying opportunity, and another September pullback would likely be another great chance to buy the dip.” The financial outlet advised a long-term approach for investors to guard against panic buys in the frenzy of a market pullback. LPL Financial’s Ryan Detrick also allowed that there was a chance the market would continue to rally, with the ‘September slump’ being avoided altogether.