| This week, we wanted to address why some people say that September is the worst month for investing?
Often in the financial media, you will hear people refer to specific times of the week, month, or year that typically provide bullish or bearish conditions.
One of the historical realities of the stock market is that it typically has performed poorest during the month of September. The “Stock Trader’s Almanac” reports that, on average, September is the worst month for market performance. Some have dubbed this annual drop-off as the “September Effect.”
Some of the key takeaways of this effect, according to the website Investopedia include:
· Since 1950, the Dow Jones Industrial Average (DJIA) has averaged a decline of 0.8% in September, while the S&P 500 has experienced an average decline of 0.5%.
· The “September Effect” seems to be a market anomaly unrelated to any particular news or market event – even in an election year.
· The “September Effect” is a worldwide phenomenon; it doesn’t only impact the U.S. markets.
· Some analysts believe this negative market effect can be attributed to a seasonal behavioral bias created by investors deciding to make changes to their investment portfolios or raising cash at summer’s end.
Understanding the September Effect
Since 1950, the month of September has seen an average decline in the Dow Jones Industrial Average (DJIA) of 0.8%, while the S&P 500 has declined by an average of 0.5%. Similarly, the Nasdaq composite index, since being established in 1971, has also fallen an average of 0.5% during September. However, it is important to highlight that this is an average exhibited over many years, and statistically-speaking, September has not been the worst month for stock-market performance every year.
The “September Effect,” as a measured market anomaly, also does not seem to be related to any particular market or news event, and in recent years, perhaps because more investors have anticipated this event, the effect has somewhat dissipated. In fact, over the past 25 years, the the average monthly return for the S&P 500 in September is approximately -0.4%, while the median monthly return has actually been positive.
In addition, frequent large declines have not occurred in September as often as they did before 1990. Again, perhaps one explanation is that investors have reacted by “pre-positioning” – that is, selling stock or rebalancing their accounts in August.
Explanations for the September Effect
The “September Effect” is also not limited to U.S. stocks, and it is a worldwide market phenomenon. Again, some analysts believe that this negative effect is attributable to a seasonal behavioral bias as investors make changes to their portfolios at summer’s end by “cashing in” on some of their year-to-date gains. Other investors may be preparing for both the end of the current year and positioning investments for next year as well.
Another reason may be that mutual funds, many of which have fiscal years ending in September – the traditional end of the 3rd quarter – and in October, may decide to harvest any short and long-term tax losses by liquidating their negative return holdings before year-end.
One other theory points to the fact there are lower trading volumes during the summer months. Many investors take vacation time during the summer and refrain from actively trading their portfolios during this downtime. However, once these vacationing investors return to work, they exit positions they had planned to sell. When this occurs, the market experiences an increased level of selling pressure and, as supply exceeds demand, the markets experience an overall decline.
How We Can Help
Understanding whether your investments are truly diversified – and not merely “different” – is more important now than ever. This is especially true if you are nearing retirement. Given the economic uncertainty from the impact of COVID and the fact we are in an election year – some may remember that it took over a month for the 2000 Presidential election to be decided – we continue to expect that the markets will remain volatile.
One of the best ways to reduce the negative impact of future market volatility is through diversification. As a professional courtesy to all UVA-affiliated staff and their extended families, we offer a complimentary review of your retirement portfolios. If you would like to take advantage of this offer and ensure you are on track with your retirement planning, please respond to this email. You may also contact our office at 434.971.5917, and someone from our staff will be happy to assist you. |
Recent Comments