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Understanding the "September Effect"

Understanding the "September Effect"

September 05, 2023

If you ask the average investor which month is the most volatile for the stock market, they will probably say October. It’s a reasonable answer, but it’s incorrect.

Despite October’s reputation for market-defining events—such as the crash of 1929 that led to the Great Depression, Black Monday’s drop in 1987, and the federal bank bailout at the start of the Great Recession in 2008—over the last 25 years, September returns of the Standard & Poor’s 500 stock index have been worse.1

This phenomenon has become known as the “September Effect.” And as you can see in the chart below, this isn’t just a U.S. market anomaly but a global trend that has been affecting stock markets worldwide.

With September upon us, we wanted to discuss the September Effect and assure you that your investment strategy takes into consideration that there will be periods of market volatility.

The September Effect Could Have Multiple Causes

Ask four market strategists what causes the September Effect, and you’ll likely get four different opinions. And while statistics show September is more volatile, much of the theory about the September Effect is anecdotal.

Here are a few:

  • Election Season—September usually begins the U.S. election cycle, which can cause investors to reposition their portfolios if they anticipate a power shift in Washington, D.C. While the September Effect isn’t limited to U.S. markets, U.S. elections can have a ripple effect worldwide. With the midterm election behind us, and the 2024 presidential election a year off, the impact of the election may be more muted this year.

    But politics may still play a role this year. Both the House and Senate will return from their August breaks and will have a few weeks to try to pass spending bills before the end of the current fiscal year on September 30. There may be some headline risk in September due to the possibility of a government shutdown on October 1. Markets may react as they did during the debt ceiling negotiation earlier this year.

  • Seasonal Rebalancing—With the end of summer, children return to school, vacations end, and investors start to position themselves for the final quarter. Trading volume tends to pick up in September as portfolio managers look to the new year. Also, institutions and other large investors may need to update portfolios for year-end reporting. This extra layer of trading can lead to a pickup in volatility.

  • Market Psychology—While market psychology and investor sentiment may be hard to quantify, they may be among the most likely reasons for the September Effect. Stocks may be volatile in September because investors expect them to. The follow-the-herd mentality is hard to resist, especially for some investors. As a result, the September Effect can become a self-fulfilling prophecy.

Stick with Your Strategy

Market timing is a challenge because some of the most significant gains happen when you least expect them, while some of the worst days occur when everything seems to be going great. We would all love to miss the worst market days, but it’s difficult to avoid them and still capture the best ones.

So, don’t get wrapped up in thinking about things you can’t control, such as the September Effect. Your investment strategy reflects your goals, time horizon, and risk tolerance, and our approach takes into consideration market fluctuations.

1. The S&P 500 Composite Index is an unmanaged index that is considered representative of the overall U.S. stock market. Index performance is not indicative of the past performance of a particular investment. Past performance does not guarantee future results. Individuals cannot invest directly in an index. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm.