There are many wonderful things about the month of September.
Here in the mid-Atlantic region, it’s when the hot and humid days of August finally give way to cooler weather. We’re at last able to turn off the air conditioner and open the windows.
Children return to school this month, which, for parents, is a joyous annual event.
And bird lovers like me revel in the start of the fall migration – the birding is wondrous.
(Last weekend on my weekly walk through the woods, I saw a red-headed woodpecker and a prothonotary warbler, among dozens of other species.)
But for investors, September is the worst.
Since 1928, the S&P 500 has lost about 1.1% on average during the month. Only two other months – February and May – have been negative on average over that time, and just barely.
So far in 2023, this long-term pattern has held true.
The market pulled back in February, right on schedule. It eked out a small gain in May, up 0.4%, but made up for the anomaly with a lackluster August. February and August aside, the S&P 500 climbed all year… until we hit September.
The index is down about 1.2% so far this month.
The Data Doesn’t Lie
Ed Yardeni – who follows market trends perhaps more closely than any other analyst I’m aware of – recently called September “a rotten month for stocks.”
This poor performance is widely known as the “September effect.” And while nothing is definitive, several reasons are usually given for this very consistent drop in September. Consider…
- Bond issuances rise in September after a summer lull, which draws money out of stocks and into fixed income. We witnessed exactly that over the past six weeks, as yields spiked and bond funds saw huge inflows.
- Investors return from vacation in September and lock in gains and tax losses by paring equity portfolios.
- Some investors sell stocks in September to pay for upcoming education costs for their children.
- After so many years of seeing losses during the month, some investors sell because they expect another downturn.
It’s impossible to know the weight of each of these factors in the typical September sell-off. But we do know it’s a reality just from looking at the data.
A Strong Finish?
The good news is that September is nearly over, and the market tends to perform well during the final three months of the year.
October through January has historically been a very strong stretch for the market.
Unusual year-end market strength comes from institutional investors – like mutual and pension funds – investing during these months. According to the Stock Trader’s Almanac, that’s led to an average gain of 4.2% between November 1 and January 31 since 1950.
Historical trends aside, there are other reasons to expect a strong finish to the year for the markets.
The recession that threatened to materialize this year hasn’t happened. Retail sales, car sales and industrial production are all trending up.
And the Federal Reserve is forecasting third quarter GDP growth of 5.9%. That would be the fastest quarterly pace of growth since the fourth quarter of 2021. (Keep in mind that the average GDP growth for the U.S. over the past 75 years has been around 3%.)
We’ll get the first estimate of third quarter GDP growth on October 26. But if it’s as strong as expected, we should be feeling it much sooner… in the labor market, in wage growth, and, eventually, in corporate sales and profits.
Of course, nothing is guaranteed. But given historical market patterns, which the current economic data seems to support, now is the time to be in the market.