Historical Theory: Is September the Worst Month for Stock Indices?

September has started on Wall Street with a somewhat gloomy mood, and on the very first trading day, Tuesday, September 3, a sharp decline in stock prices was recorded, particularly in the technology sector. The Dow Jones slid 1.51% that day, the S&P 500 fell 2.12%, and the Nasdaq index dropped 3.26%. Nervousness and caution on Wall Street have continued to this day as data on employment in the U.S. was awaited, which last month triggered a significant correction across global stock markets. However, the data released today by the U.S. Bureau of Labor Statistics shows that unemployment in the U.S. is 0.1% lower than the previous month, indicating that the period of continuous unemployment growth in the U.S. has been interrupted, so there should not be any new surprises related to this data on Wall Street.

At least that is to be hoped, but history tells a different story as, according to the chief market strategist at the Carson Group consulting firm, September has been the month with the worst stock market performance over the past nearly one hundred years. According to Fisher Investments, it is also the only month that has consistently ended with negative returns since 1925 (on average -0.78%).

There are several theories that explain this historical pattern. One of these theories claims that investors, returning to work after summer vacations, rebalance their portfolios in September, thereby increasing the volume of sales and putting pressure on stock prices. Another theory suggests that bond offerings increase in September because, again, summer vacations are over, and bond sales attract money that would otherwise support stock prices. A third theory blames mutual funds, whose fiscal years usually end on October 31, so funds, according to the theory, intentionally finish the last months of the fiscal year with poorer results.

Of course, none of these explanations is ‘set in stone’. Although trading tends to decline during the summer months when most people take vacations, algorithmic trading and the ability to invest online, regardless of location, have mitigated the impact of summer vacations on stocks.

The Bigger Problem is the Presidential Elections

It seems that September’s bad reputation arises more from a few unfortunate years than from any specific reason. In September 1931, at the height of the Great Depression, the predecessor of the S&P 500 index fell 29.6%, marking the worst month in history. Another bad September came in 2008 when the benchmark index fell nearly nine percent due to the collapse of Lehman Brothers.

On the other hand, during the last century, stocks have risen slightly more often than they have fallen in September, which means that the theory that September is the worst month for investing sometimes does not hold water. This year, many investors in U.S. stock indices are more apprehensive about November as uncertainty looms from the upcoming presidential elections.

However, historically, presidential elections have not overly affected stocks, especially not in September. Stocks have risen in nearly a third (62.5%) of Septembers before presidential elections (in 15 out of 24 election years since 1925), while the average September return in presidential election years is 0.3%.

Nevertheless, markets react daily to perceptions of the state of the U.S. economy and investor expectations, rather than historical patterns. Investor estimates regarding this specific election cycle and the perceived consequences of each candidate’s economic proposals could influence stock performance this month. Along with the elections, several other uncertainties loom, such as inflation data and the next moves of the Federal Reserve, which will significantly impact market movements.

The theory of September as the worst month was also commented on by Charles-Henry Monchau, a member of the Board of Directors of the Swiss Syz Group, on his LinkedIn profile.

– September is historically the worst month of the year: the S&P 500 has averaged a decline of -2.3% in September over the last 10 years, marking the only month with negative returns. Since World War II, the average September return has been negative, -0.8%. Moreover, the volatility index has recorded an average jump of about 10% in September over the last 33 years. After that, in October and November, the S&P 500 has averaged gains of +1.6% and +3.8%. Markets are entering their most volatile period of the year – commented Monchau.