5mins read
Published on: Sep 9, 2024
#Financial Markets
September is infamously known for fueling the stock market with concerns about declining returns.
Is September truly the worst-performing month for the market?
➔ The September Effect is a stock market phenomenon in which the market shows terrible returns during September almost every year.
➔ The phenomenon is considered an anomaly as there is no explicit reason for the decline in market performance during September.
➔ Is September 2024 going to be a similar anomaly or is it going to be a deviation from the norm?
September is known to be the worst performing month for trading. It's the Fall that brings about a fall in stock prices. There is statistical data as well as anecdotal instances to indicate that the current month is once again going to be a harbinger of bad luck for the stock market. Let's learn about the September effect phenomenon in more detail.
The September Effect is a stock market phenomenon in which the market shows terrible returns during September almost every year. Even though there is no explicit reason for this drastic decline in the stock market’s performance during September, there is data that shows September to be the worst-performing month for the stock market, therefore often deemed as an anomaly.
Let’s look at the stock market performance of the S&P 500 (SPX) index year by year to see if the September Effect is indeed a true phenomenon. The S&P 500 is a stock market index that tracks the stock performance of 500 of the largest companies listed on stock exchanges in the U.S.
Image: Average S&P Returns by Calendar Month (1926-Present), by Fortune
► Since 1928, the S&P 500 has an average decline of 1.2% during September while it’s had average gains in the rest of the months.
► The index has shown a decline in September for 55% of all the years since 1928.
► In fact, the average decline during September has surged to 2.3% during the last decade.
► In 2022, the S&P 500 witnessed a decline of 9.34% — its worst September performance since 1974.
► Since 1928, the S&P 500 has closed September negative in 52 years. In comparison, it turned positive in only 42 years.
► 1979 was the year when the S&P 500’s performance remained unchanged.
► In fact, September is the only month whose average return since 1926 is negative.
Since 1950, the Dow Jones Industrial Average (DJIA) has averaged a decline of around 1% in September. Other market indices showed a similar performance in September.
Image: DJIA (1897), S&P 500 (1928), Nasdaq (1971), Russell 2000 (1987), by Dow Jones Market Data
We mentioned earlier how there is no explicit reason behind the phenomenon of the September Effect that leads to negative returns in the stock market. Yet, there are a few possible reasons that explain the phenomenon to some extent.
Investors come back from their vacation in September and lock in gains and tax losses behind the end of the fiscal year. In the United States, the fiscal year begins on October 1. Retail investors tend to liquidate their stocks in September to manage the tuition costs of their children’s school sessions.
Many institutional investors also liquidate their stocks in September ahead of the next trading quarter.
This is rather peculiar, but a lot of investors believe in the said phenomenon. This is why they anticipate the September Effect, and their trading patterns tend to align with such a negative sentiment.
If we look at the stock market history, we can conclude that January (1.2%), July (1.7%), April (1.4%), and December (1.3%) are the best-performing months for traders. January and December tend to be rather optimistic months due to the excitement surrounding the Santa Rally and New Year.
April marks the beginning of the next quarter after the Santa Rally phenomenon, possibly leading to excitement in the market. Index rebalancing in June leads to a better stock market performance in July.
So, which are the worst-performing months for the stock market? February (average decline of 0.1%), May (0.1%), and September (1.1%) count among the worst months for the market.
It's profit-taking following the strong returns in December- January and April that leads to weaker performances in February and May. But September has proven to be the worst month for the stock market due to the September Effect.
If we look at the performance of the stock market in September so far, it seems that the curse of the September Effect is going to haunt us in 2024 too. Nvidia (NVDA) has led the decline of the stock market for a few days.
Recommended Read: Nvidia Suffers Record $279 Billion Loss Following Subpoenas from DOJ
During the last few years, only five S&P 500 stocks posted a positive average gain in September. All these stocks belong to the financial sector. However, this is not a financial situation in the stock market. We leave it to you to do your own research (DYOR) before making an investment in the stock market or elsewhere.
Please remember that September isn’t always the worst performing month for the stock market every year. It’s only based on average returns over the years that September can be counted as the worst, but that’s not true for every year. In fact, the median return for September has been positive over the years.
It is always advised to observe the current market dynamics and historical market trends to analyse how you plan to conduct trading this September.
The September Effect is a phenomenon in the stock market in which stocks show terrible returns nearly every year during September.
The S&P 500 index is a standard indicator of the U.S. stock market.
• Since 1928, the index has had an average decline of 1.2% during September.
• The index has shown a decline in September for 55% of all the years since 1928.
Other indices are no different when it comes to their September performance. So, the September Effect tends to overtake the entire stock market.
These are the following reasons for the September Effect:
• In September, investors lock in gains and tax losses before the end of the fiscal year.
• In September, retail investors tend to liquidate their stocks to manage the tuition costs of their children.
• In September, institutional investors tend to liquidate their stocks ahead of the next trading quarter.
• In September, many traders are overcome with negative sentiment due to the phenomenon of the September Effect.
The best-performing months for the stock market are January (average return of 1.2%), July (1.7%), April (1.4%), and December (1.3%).
The worst-performing months for the stock market are February (average decline of 0.1%), May (0.1%), and September (1.1%).
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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