what is the september effect

What Is the September Effect in Stocks?

7 min read

In a previous article, we tackled a popular belief among investors, ‘’sell in May and go away”. It’s a popular saying because many investors believe the warm summer months usually perform very poorly compared to the rest of the year. In the past, technology and the internet weren’t as widespread, which made investing difficult while enjoying our holidays. Today, it isn’t the case anymore. It has never been easier to trade from the beach or the mountains. However, many investors aren’t aware that, historically speaking, September has been the worst month for investments. This isn’t true in the US, but we are talking globally. Due to changing market conditions and externalities, this isn’t a given every year. In any case, September is very close, and we need to prepare ourselves with some useful data. Let’s take a look at the September Effect.

What is the September effect? Throughout the year, there are periods when investors are bearish and others when they are bullish. Historically speaking, September falls, without a doubt, in the bearish category. September is known to be the month with the poorest stock market performance. Markets around the world perform far below the annual average. In the US alone, the three major indexes (DJIA, S&P 500, and NASDAQ) perform much worse than in other months. The average performance during September is negative. The last two weeks of December follow a similar pattern to the one before the Santa Claus rally

The reason for this drop doesn’t always have something to do with the stock market but with investors’ psychology. This isn’t the case every September, but historically, there is a correlation. The stock market is an ever-changing environment, and things will change occasionally, but it can always be useful to be prepared if the scenario repeats itself. Let’s explore why September has been a poor month for stocks.

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September Effect Causes

What is the September effect? Many factors make September a bad month for stocks. It’s hard to pinpoint the exact reason. Below is a list of the possible causes.

US Elections

Earlier in this article, we said that the September effect is global. What do the US mid-terms, elections, and political coverage do with this? What happens in the US can send waves into other markets. When Trump got elected, the first few days were chaotic.

Afterward, chaos gave place to an incredible rally that lasted many months. US politics are known to influence stock markets around the world or certain sectors. Biden’s first months were positive for renewable energy, cannabis, and EVs. The entire world believed stocks would perform even better under Biden. Surprise, surprise…

End of Summer and Seasonality

Summer months are known to be less busy for the stock market. The average daily volume is down. When investors return home after their holidays, they may have less money, and their focus shifts to their work and family. This is perhaps one of the weakest arguments, as many wealthiest investors aren’t affected by their summer holidays. When they see a potentially profitable investment, they invest. The September effect is still considered the summer months.

Psychology

One of the simplest reasons for the September effect is psychological and emotional. Many investors know that September isn’t very profitable and don’t want to take any chances. Many positions are liquidated to prevent any losses. Furthermore, some of the biggest crashes in history began in September and October. The past does repeat itself, and sometimes it’s better to be safe than sorry. We will expand on October in the final section.

Funds Rebalancing

Finally, regarding the September effect, many mutual funds and ETFs rebalanced their portfolios and sold losing positions in September. It can cause some stocks to lose value, but it isn’t significant. 

What Is the September Effect Data?

Now that we know about the September effect, let’s look at the numbers to understand better what we face every year. Between 1928 and 2021, the S&P’s average return during September is -1 %. Since 1950, the DJIA’s average return was -0.8%, and the S&P’s was -0.5%.

In the last 25 years, the S&P’s average return was 0.4% in September. The S&P’s last twenty-five September have yielded negative returns. The numbers seem to get better as we progress slowly. Maybe by 2050, the average return will be 0%! However, if we look at the median return for the S&P, it is 1.4%. 

Looking at September globally, 61% of countries have negative stock market returns. May, August, and June are all above 40%. On the other hand, January, February, March, April, July, and December have yielded mostly positive returns for more than 80% of countries. The table below summarizes it pretty well. 

September Effect
Source: Vichet Sum, CRSP, Global Financial Database

Below is a list of returns for the S&P 500 index between 1928 and 2022. We can see that September is by far the worst month of all. 

January: 1.2%

February: -0.1%

March: 0.5%

April: 1.4%

May: -0.1%

June: 0.7%

July: 1.7%

August: 0.7%

September: -1%

October: 0.5%

November: 0.8%

December: 1.4%

September 2021 was a particularly grim month for investors. The S&P recorded a 4.65% loss. In Europe, markets lost between 3-4% as well.

What About October?

We conclude this September effect article with October. If September was the worst historical investment month, October must be better. The month of October has had its share of negativity. On October 24th and 29th of 1929, the DJIA plummeted by 11% and 12%, respectively. This marked the beginning of the Great Depression.

In 1987, Black Monday occurred on October 19th. The DJIA lost 22.6% in a single trading session. Despite three record-breaking losses in October, it ranks in the middle of the pack for returns. The catalysts to those crashes date back to September. These losses are statistically insignificant. Based on those three dates, investors may withdraw from the stock market in October.

What can we conclude for October? Psychological factors largely cause it, and no evidence supports that October is bad for the stock market. On the contract, October often begins a bull run that lasts until the Christmas holidays. Historically, November and December are among the best months for investors.

Final Thoughts

To conclude, the September effect is mostly psychological. When we take the data from over a century ago, the returns for this month are worse than in the last 25 years. Everything points to the fact that the September effect is largely psychological. Some experts attribute poor results in September to other factors, such as politics and the end of the summer, but they aren’t always reliable arguments.

A few market crashes began in September and October. Some investors look at history and are scared for it to repeat itself. They’d rather keep their money safe than gamble with the stock market

Market seasonalities don’t happen every year. The “January effect” and “Sell in May and go away” are other examples of beliefs that aren’t always accurate. Trading during those months may not always be easy. Our community can help. 

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