The “September Effect”: Why Is September Historically the Worst Month for the Stock Market?
For years, people in the financial world have noticed something “off” about the stock market’s behavior in September. Often referred to as the “September Effect,” this is when the stock market tends to perform worse in September compared to any other month of the year.
Investors, analysts, and economists have been scratching their heads over this for quite some time because it doesn’t seem to follow typical market patterns. Whether it’s chalked up to psychological factors, seasonal trends, or specific economic reasons, the September Effect remains a topic of discussion. In this article, we’ll dig into some of the theories and reasons that might explain why September is historically such a bad month for the stock market.
A Quick Look at the September Effect
Before diving into the potential causes behind the September Effect, it’s important to get a little historical background. Over the years, September has consistently been one of the worst months for stock performance. Major stock indices like the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500) often show declines during this time. In fact, since these indices were first established, September has earned a reputation for being a historically weak month for returns.
Going back to 1928, the S&P 500 has declined an average 1.2% in September, the weakest month of the year for stocks. The index ended lower 56% of the time over that stretch, according to Dow Jones Market Data.
This trend has been recognized so widely that it’s become known as the “September Effect.” Unlike other phenomena, like the “January Effect”—when stock prices usually rise in the new year—September’s pattern of poor performance is harder to explain. This has given rise to several interesting theories, some tied to investor behavior, and others linked to the economic calendar.
Theory 1: Portfolio Rebalancing and Tax-Loss Selling
One of the most plausible explanations for the September Effect involves institutional investors and how they manage their portfolios, specifically around rebalancing and tax-loss selling.
Portfolio Rebalancing
Big players like mutual funds, hedge funds, and pension funds typically stick to a quarterly rebalancing strategy. Basically, this means they adjust their portfolios to maintain a specific mix of assets, like stocks and bonds. For instance, if a fund’s target is to have 60% in stocks and 40% in bonds, a strong market might push them over that 60% threshold. To get back to their target, they’ll sell off some stocks, often in September since it’s the end of the third quarter. This selling can trigger a chain reaction in the market, pushing prices down.
Tax-Loss Harvesting
Another factor could be tax-loss harvesting. Investors can reduce their tax bill by selling stocks that have lost value to offset gains elsewhere. As we approach the end of the fiscal year, investors often start selling off underperforming stocks. This tends to happen around September, adding even more downward pressure on stock prices, which contributes to the September Effect.
Theory 2: Behavioral Biases and Investor Psychology
Another big piece of the puzzle might be how investors behave, especially when it comes to seasonal trends and emotions. Behavioral finance, a field that studies how psychological factors influence investors, offers some interesting insights into why September might be so rough.
The Post-Summer Reality Check
July and August are typically slower months for the stock market. Many traders and investors are on vacation, so the market is a little quieter and more relaxed. But when everyone returns to work in September, it’s time to face the music. Any economic data, earnings reports, or political events that were brushed aside during the summer come back into focus. This “reality check” can make traders and investors more cautious, leading to increased selling.
End of the Summer Optimism
There’s also a sense that the stock market tends to be a bit more upbeat during the summer months, possibly because of the lighter trading volume and less scrutiny. However, when September rolls around, this optimism fades. Investors may become more conservative and cautious as they reassess their portfolios and focus on the remainder of the year. This shift in mood can lead to more selling pressure, driving stock prices lower.
Some experts even suggest a link between the changing seasons and investor behavior. As the summer ends and fall approaches, investors might become more risk-averse due to psychological shifts tied to seasonal changes.
Theory 3: Economic Factors and Business Cycles
The September Effect might also be tied to bigger economic patterns, including the timing of business cycles and fiscal policy.
Corporate Profit-Taking and Earnings Season
September marks the start of an important time in the corporate world, as companies prepare for the third-quarter earnings season. Investors may worry that companies won’t meet expectations, leading them to sell stocks ahead of earnings reports. Additionally, corporations themselves might engage in profit-taking, selling off assets or shares to strengthen their balance sheets before the end of the quarter. All of this selling adds pressure to the stock market, contributing to the September Effect.
Fiscal Deadlines and Policy Changes
September is also a critical month for government fiscal policies, particularly in the U.S., where the federal fiscal year ends on September 30. Budget debates, debt ceiling discussions, or potential government shutdowns can create uncertainty in the market, and investors typically don’t like uncertainty. As a result, they may sell stocks in anticipation of any negative fallout from these events.
At the same time, central banks like the Federal Reserve often review their monetary policies around September. Investors may grow nervous about potential interest rate hikes or other changes that could affect the economy, leading to cautious behavior in the market. This September, in particular, the Fed is under unusually high scrutiny as we await what could be one of the largest unwinding of rate hikes in history.
Theory 4: The “Back-to-School” Effect
One more interesting, albeit more speculative, theory is the so-called “back-to-school” effect. This idea suggests that changes in consumer behavior as the summer ends might contribute to the September Effect.
Reduced Consumer Spending
As kids head back to school and families return to their usual routines, discretionary spending tends to slow down. The summer months are often associated with higher spending on vacations, entertainment, and retail. But when fall arrives, this consumer spending wave tends to drop off. Retailers and other businesses that rely on seasonal spending may see reduced revenue, which could negatively impact their stock prices. Investors anticipating this drop-off may start selling their shares, pushing stock prices lower.
Business Cycle Shifts
September also represents a natural transition point in the business cycle for many companies. Retailers, in particular, may start winding down from their busy summer season and preparing for the slower months ahead. This lull in economic activity could also contribute to a general market slowdown.
Theory 5: The Self-Fulfilling Prophecy
Finally, one of the most interesting theories is that the September Effect might actually be a self-fulfilling prophecy. The more that investors expect September to be a bad month for stocks, the more they act in ways that make it come true.
Herd Behavior
In behavioral finance, herd behavior refers to people’s tendency to follow the actions of others, especially in the stock market. If enough investors believe that September is going to be bad, they’ll start selling early to avoid losses. When enough people do this, it creates downward pressure on the market, and the September Effect becomes a reality.
Market Timing
Some investors and traders try to time the market by selling before the September downturn and buying back after prices have dropped. While this strategy can be risky, if enough people follow it, it amplifies the effect of selling in September, making the month worse for the market.
Is the September Effect Here to Stay?
While the September Effect has been observed over many years, it’s important to note that not every September is a bad month for stocks. There have been times when the market actually performed well during September, which goes against the typical trend. Plus, with today’s globalized markets and the rise of algorithmic trading, some experts believe the impact of the September Effect might be weakening.
There’s also an argument that the September Effect might not be as relevant in today’s economy, where larger factors like geopolitical events, technology shifts, and quick access to information play a much bigger role in stock market movements.
Wrapping It Up
The September Effect is one of the stock market’s most intriguing patterns. While there’s no single explanation for why September tends to be a rough month for stocks, a combination of factors might be at play. These include institutional portfolio rebalancing, behavioral biases, economic cycles, fiscal policy uncertainty, and even the idea that investor expectations help create the very downturn they’re worried about.
For investors, it’s important to be aware of this historical trend, but it’s equally crucial not to rely solely on it when making decisions. Markets are complex, and many factors can influence stock prices. Whether or not the September Effect will continue to hold remains to be seen, but it’s certainly worth keeping an eye on. And hey, the remaining fall months tend to be pretty good, so we’ll keep our fingers crossed!
Sources:
WSJ Market Data
https://www.investopedia.com/terms/s/september-effect.asp
https://www.tradingview.com/news/invezz:34f5de0c5094b:0-september-effect-explained-why-it-s-a-tough-month-for-stock-markets/
https://www.cmegroup.com/openmarkets/equity-index/2023/three-reasons-for-the-September-Effect-in-stocks.html
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
Why is September the Worst Month for the Stock Market?
The “September Effect”: Why Is September Historically the Worst Month for the Stock Market?
For years, people in the financial world have noticed something “off” about the stock market’s behavior in September. Often referred to as the “September Effect,” this is when the stock market tends to perform worse in September compared to any other month of the year.
Investors, analysts, and economists have been scratching their heads over this for quite some time because it doesn’t seem to follow typical market patterns. Whether it’s chalked up to psychological factors, seasonal trends, or specific economic reasons, the September Effect remains a topic of discussion. In this article, we’ll dig into some of the theories and reasons that might explain why September is historically such a bad month for the stock market.
A Quick Look at the September Effect
Before diving into the potential causes behind the September Effect, it’s important to get a little historical background. Over the years, September has consistently been one of the worst months for stock performance. Major stock indices like the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500) often show declines during this time. In fact, since these indices were first established, September has earned a reputation for being a historically weak month for returns.
Going back to 1928, the S&P 500 has declined an average 1.2% in September, the weakest month of the year for stocks. The index ended lower 56% of the time over that stretch, according to Dow Jones Market Data.
This trend has been recognized so widely that it’s become known as the “September Effect.” Unlike other phenomena, like the “January Effect”—when stock prices usually rise in the new year—September’s pattern of poor performance is harder to explain. This has given rise to several interesting theories, some tied to investor behavior, and others linked to the economic calendar.
Theory 1: Portfolio Rebalancing and Tax-Loss Selling
One of the most plausible explanations for the September Effect involves institutional investors and how they manage their portfolios, specifically around rebalancing and tax-loss selling.
Portfolio Rebalancing
Big players like mutual funds, hedge funds, and pension funds typically stick to a quarterly rebalancing strategy. Basically, this means they adjust their portfolios to maintain a specific mix of assets, like stocks and bonds. For instance, if a fund’s target is to have 60% in stocks and 40% in bonds, a strong market might push them over that 60% threshold. To get back to their target, they’ll sell off some stocks, often in September since it’s the end of the third quarter. This selling can trigger a chain reaction in the market, pushing prices down.
Tax-Loss Harvesting
Another factor could be tax-loss harvesting. Investors can reduce their tax bill by selling stocks that have lost value to offset gains elsewhere. As we approach the end of the fiscal year, investors often start selling off underperforming stocks. This tends to happen around September, adding even more downward pressure on stock prices, which contributes to the September Effect.
Theory 2: Behavioral Biases and Investor Psychology
Another big piece of the puzzle might be how investors behave, especially when it comes to seasonal trends and emotions. Behavioral finance, a field that studies how psychological factors influence investors, offers some interesting insights into why September might be so rough.
The Post-Summer Reality Check
July and August are typically slower months for the stock market. Many traders and investors are on vacation, so the market is a little quieter and more relaxed. But when everyone returns to work in September, it’s time to face the music. Any economic data, earnings reports, or political events that were brushed aside during the summer come back into focus. This “reality check” can make traders and investors more cautious, leading to increased selling.
End of the Summer Optimism
There’s also a sense that the stock market tends to be a bit more upbeat during the summer months, possibly because of the lighter trading volume and less scrutiny. However, when September rolls around, this optimism fades. Investors may become more conservative and cautious as they reassess their portfolios and focus on the remainder of the year. This shift in mood can lead to more selling pressure, driving stock prices lower.
Some experts even suggest a link between the changing seasons and investor behavior. As the summer ends and fall approaches, investors might become more risk-averse due to psychological shifts tied to seasonal changes.
Theory 3: Economic Factors and Business Cycles
The September Effect might also be tied to bigger economic patterns, including the timing of business cycles and fiscal policy.
Corporate Profit-Taking and Earnings Season
September marks the start of an important time in the corporate world, as companies prepare for the third-quarter earnings season. Investors may worry that companies won’t meet expectations, leading them to sell stocks ahead of earnings reports. Additionally, corporations themselves might engage in profit-taking, selling off assets or shares to strengthen their balance sheets before the end of the quarter. All of this selling adds pressure to the stock market, contributing to the September Effect.
Fiscal Deadlines and Policy Changes
September is also a critical month for government fiscal policies, particularly in the U.S., where the federal fiscal year ends on September 30. Budget debates, debt ceiling discussions, or potential government shutdowns can create uncertainty in the market, and investors typically don’t like uncertainty. As a result, they may sell stocks in anticipation of any negative fallout from these events.
At the same time, central banks like the Federal Reserve often review their monetary policies around September. Investors may grow nervous about potential interest rate hikes or other changes that could affect the economy, leading to cautious behavior in the market. This September, in particular, the Fed is under unusually high scrutiny as we await what could be one of the largest unwinding of rate hikes in history.
Theory 4: The “Back-to-School” Effect
One more interesting, albeit more speculative, theory is the so-called “back-to-school” effect. This idea suggests that changes in consumer behavior as the summer ends might contribute to the September Effect.
Reduced Consumer Spending
As kids head back to school and families return to their usual routines, discretionary spending tends to slow down. The summer months are often associated with higher spending on vacations, entertainment, and retail. But when fall arrives, this consumer spending wave tends to drop off. Retailers and other businesses that rely on seasonal spending may see reduced revenue, which could negatively impact their stock prices. Investors anticipating this drop-off may start selling their shares, pushing stock prices lower.
Business Cycle Shifts
September also represents a natural transition point in the business cycle for many companies. Retailers, in particular, may start winding down from their busy summer season and preparing for the slower months ahead. This lull in economic activity could also contribute to a general market slowdown.
Theory 5: The Self-Fulfilling Prophecy
Finally, one of the most interesting theories is that the September Effect might actually be a self-fulfilling prophecy. The more that investors expect September to be a bad month for stocks, the more they act in ways that make it come true.
Herd Behavior
In behavioral finance, herd behavior refers to people’s tendency to follow the actions of others, especially in the stock market. If enough investors believe that September is going to be bad, they’ll start selling early to avoid losses. When enough people do this, it creates downward pressure on the market, and the September Effect becomes a reality.
Market Timing
Some investors and traders try to time the market by selling before the September downturn and buying back after prices have dropped. While this strategy can be risky, if enough people follow it, it amplifies the effect of selling in September, making the month worse for the market.
Is the September Effect Here to Stay?
While the September Effect has been observed over many years, it’s important to note that not every September is a bad month for stocks. There have been times when the market actually performed well during September, which goes against the typical trend. Plus, with today’s globalized markets and the rise of algorithmic trading, some experts believe the impact of the September Effect might be weakening.
There’s also an argument that the September Effect might not be as relevant in today’s economy, where larger factors like geopolitical events, technology shifts, and quick access to information play a much bigger role in stock market movements.
Wrapping It Up
The September Effect is one of the stock market’s most intriguing patterns. While there’s no single explanation for why September tends to be a rough month for stocks, a combination of factors might be at play. These include institutional portfolio rebalancing, behavioral biases, economic cycles, fiscal policy uncertainty, and even the idea that investor expectations help create the very downturn they’re worried about.
For investors, it’s important to be aware of this historical trend, but it’s equally crucial not to rely solely on it when making decisions. Markets are complex, and many factors can influence stock prices. Whether or not the September Effect will continue to hold remains to be seen, but it’s certainly worth keeping an eye on. And hey, the remaining fall months tend to be pretty good, so we’ll keep our fingers crossed!
Sources:
WSJ Market Data
https://www.investopedia.com/terms/s/september-effect.asp
https://www.tradingview.com/news/invezz:34f5de0c5094b:0-september-effect-explained-why-it-s-a-tough-month-for-stock-markets/
https://www.cmegroup.com/openmarkets/equity-index/2023/three-reasons-for-the-September-Effect-in-stocks.html
Concerns or questions about how your investment portfolio will hold up in the current market environment? Contact Financial Synergies today.
We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate turbulent markets. To learn more about our approach to investment management please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.
More relevant articles by Financial Synergies:
Blog Disclosures
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own financial advisors as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blogs, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Financial Synergies Wealth Advisors, Inc. employees providing such comments, and should not be regarded as the views of Financial Synergies Wealth Advisors, Inc. or its respective affiliates or as a description of advisory services provided by Financial Synergies Wealth Advisors, Inc. or performance returns of any Financial Synergies Wealth Advisors, Inc. client.
Any opinions expressed herein do not constitute or imply endorsement, sponsorship, or recommendation by Financial Synergies Wealth Advisors, Inc. or its employees. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this website constitutes investment or financial planning advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. It also should not be construed as an offer soliciting the purchase or sale of any security mentioned. Nor should it be construed as an offer to provide investment advisory services by Financial Synergies Wealth Advisors, Inc.
Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Synergies Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Any charts provided here or on any related Financial Synergies Wealth Advisors, Inc. personnel content outlets are for informational purposes only, and should also not be relied upon when making any investment decision. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Information in charts have been obtained from third-party sources and data, and may include those from portfolio securities of funds managed by Financial Synergies Wealth Advisors, Inc. While taken from sources believed to be reliable, Financial Synergies Wealth Advisors, Inc. has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. All content speaks only as of the date indicated.
Financial Synergies Wealth Advisors, Inc. is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Financial Synergies Wealth Advisors, Inc. and its representatives are properly licensed or exempt from licensure. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
See Full Disclosures Page Here
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