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Few things are certain in this life: death, taxes, and the stock market declining in September. Well, the third is not exactly true, but September is historically the worst month for stocks out of the calendar year.

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According to S&P Global, the S&P 500 has declined in September 55% of years since 1928 –by far the most out of any month, and the only individual month that has declined at least 50% of the time over the last 94 years. According to The Stock Trader’s Almanac, in 2022 the S&P 500 experienced the worst performing September since 1974, declining 9.34%. 

The overall markets are extremely cyclical and trend heavy, and this almost century-old anomaly is no different. While it is not a certainty, the trend is noticeable enough to have been dubbed “The September Effect.” It is difficult to pin down exactly why September experiences more market declines than any other month, but there are three main theories as to why this phenomenon exists.

  1. Traders’ vacation schedules. People tend to vacation in the summer months, typically generating below average trading volume and lower volatility from June-August. Coming out of the summer, portfolio managers and investors alike tend to be eager to rebalance their portfolios and exit positions to make room for new holdings. This concentrated pocket of selling creates increased selling pressure, and can bring increased volatility in the marketplace. Overall increased volatility has historically pushed into October and while September is historically the worst month for stock performance, October has been the most volatile month. 

  2. Fund schedules. Many mutual fund companies end their fiscal year in September, and similar to how investors harvest investment losses in November and December, mutual fund companies purge their portfolios the same way in September. The targeted sales of losing positions in the portfolio intensifies the selling pressure already established by investors and traders who are rebalancing their portfolios.  

  3. Bond market activity. Although the correlation between stocks and bonds was seemingly broken in 2022 when both assets declined significantly, activity in the bond market tends to precede equity moves and may signal a direction for the stock market. Higher interest rates make bond investments more attractive to investors, often pulling capital from the stock market leading to a decline in equity prices. 

We saw this happen in 2022 as the Fed began their rate-hiking cycle, in which capital flowed out of stocks and into bonds, contributing to the S&P 500’s 20% loss that year. The cyclical nature of new bond issues generates cause and effect each year. Like equity trading volumes, bond issuances lull in the summertime, and then spike in September. The rush of new issuances pulls money into the bond markets, driving investors to sell equity positions and reducing their liquidity. 

There is no exact science or rationale as to why September is historically the worst month of the year for stocks. However, the sample size is large enough to suggest that investors should be prepared for cyclical market declines during the autumn months.




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