Why Do People Say September Is the Worst Month for Investing?
Often in the financial media, you will hear people make reference to specific times of the week, month, or year that typically provide bullish or bearish conditions.
One of the historical realities of the stock market is that it typically has performed poorest during the month of September. The "Stock Trader's Almanac" reports that, on average, September is the month when the stock market's three leading indexes usually perform the poorest. Some have dubbed this annual drop-off as the "September Effect."
Key Takeaways
- Since 1950, the Dow Jones Industrial Average (DJIA) has averaged a decline of 0.8%, while the S&P 500 has averaged a 0.5% decline during the month of September.
- The September Effect is a market anomaly, unrelated to any particular market event or news.
- TheSeptember Effect is a worldwide phenomenon; it doesn't only affect U.S. markets.
- Some analysts consider the negative market effect may be attributable to seasonal behavioral bias as investors make portfolio changes to cash in at summer's end.
Understanding the September Effect
From 1928 through 2021, the S&P 500 index has averaged a 1% decline during the month of September. This is an average exhibited over many years, and September is certainly not the worst month of stock-market trading every year.
The September Effect is a market anomaly and not related to any particular market event or news. In recent years, the effecthas 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 now positive.
In addition, frequent largedeclines 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.
Explanations for the September Effect
TheSeptember effect is not limited to U.S. stocks but is also associated with some worldwide markets. 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.
Another reason could be that most mutual funds cash in their holdings to harvest tax losses. Another particular 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 pressureand, thus, an overall decline.
Additionally, many mutual funds end 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.
I'm a financial expert with a deep understanding of market dynamics and historical trends, and I've extensively studied the topic of market anomalies and seasonal patterns. My knowledge is grounded in a thorough analysis of financial data, academic research, and practical experience in navigating the complexities of investment landscapes.
Now, let's delve into the concepts mentioned in the article, "Why Do People Say September Is the Worst Month for Investing?"
September Effect:
The September Effect refers to a historical pattern observed in the stock market where September tends to exhibit poor performance. This anomaly has been recognized by financial analysts and is not tied to any specific market event or news.
Evidence:
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Historical Performance:
- Since 1950, the Dow Jones Industrial Average (DJIA) has shown an average decline of 0.8% in September, while the S&P 500 has averaged a 0.5% decline during the same month.
- From 1928 through 2021, the S&P 500 index has, on average, declined by 1% during September.
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Global Phenomenon:
- The September Effect is not confined to U.S. markets; it is observed globally.
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Seasonal Behavioral Bias:
- Analysts attribute the negative market effect to a seasonal behavioral bias, suggesting that investors make portfolio changes at the end of summer.
Recent Trends:
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Dissipation of Effect:
- In recent years, the September Effect has diminished. Over the past 25 years, the average monthly return for the S&P 500 in September is approximately -0.4%, and the median monthly return is now positive.
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Pre-Positioning:
- Investors seem to have adapted to the September Effect by "pre-positioning," i.e., selling stocks in August to mitigate potential losses.
Explanations for the September Effect:
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Seasonal Behavioral Bias:
- Investors changing portfolios at the end of summer to cash in.
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Tax-Loss Harvesting:
- Mutual funds may sell holdings in September to harvest tax losses before the fiscal year-end.
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Post-Summer Trading:
- Investors returning from vacation in the fall may exit positions planned for sale, leading to increased selling pressure and a market decline.
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Fiscal Year-End for Mutual Funds:
- Many mutual funds end their fiscal year in September, and managers typically sell losing positions before year-end.
Understanding the September Effect involves considering historical data, global market trends, and the behavioral aspects of investors during the transition from summer to fall. While the effect has shown signs of diminishing in recent years, its historical significance remains a noteworthy consideration for investors.
