Is September REALLY the Worst Month for Stocks?

September is known as the worst month for stocks, but should you panic and sell your investments? Today, we’re going to break down the numbers, uncover the truth behind the ‘September Effect,’ and help you decide whether to stay in the market or cash out!

The History of the September Effect

First off, what exactly is the September Effect? For the past 98 years, September has earned a reputation as the only month to consistently show negative average returns in the stock market. Since 1928, the S&P 500 has historically dropped by an average of 0.5% during this month. Sounds scary, right? 

This tendency for weaker stock performance in September is not a fluke. In fact, September has been dubbed the “jinx month” for the market. But here’s the thing: despite its bad reputation, stocks have actually risen slightly more often than they’ve fallen in September. Between 1928 and 2021, stocks have fallen 47% of the time in September, but they’ve risen 53% of the time. So, while the month can see negative trends, it’s certainly not a guaranteed disaster every year.

Theories Behind the September Effect

So why does this happen? There are several theories as to why September tends to drag down the markets. One theory suggests that large institutional investors, such as mutual funds and hedge funds, rebalance their portfolios before the final quarter of the year, causing more selling activity. Another theory points to the end of summer as a time when people sell off stocks to pay for expenses like vacations and back-to-school costs. Bond offerings and fiscal year-end for many mutual funds also play a role in the month’s peculiar performance.

But none of these factors fully explain why September lags behind other months. Some argue it’s more psychological than anything else—a sort of self-fulfilling prophecy, where investors expect a downturn and therefore behave in ways that lead to one. With a nearly century-long history of weaker returns in September, many investors may be conditioned to act cautiously, further driving the trend.

The Election Year Boost

However, there’s an interesting twist when it comes to election years. September tends to perform better in the months leading up to U.S. presidential elections. Historically, the S&P 500 has risen in about 62.5% of Septembers in election years. This boost could be due to optimism or policy speculation as investors look ahead to potential economic changes brought on by new political leadership.

This doesn’t mean every election year September is positive, but the historical pattern is worth noting for those worried about how this year may unfold. In times of political change, the market tends to become more volatile as investors attempt to predict how new policies might impact various industries. But this same volatility can create opportunities for savvy investors.

Uncertainties Like Inflation and Fed Policies

It’s important to remember that markets don’t move in isolation, and September is no different. Broader uncertainties like inflation, interest rates, and Federal Reserve policies play a major role in market behavior. In recent years, inflation has crept higher, leading to speculation about more aggressive rate hikes by the Fed. This can spook investors and lead to a more volatile stock market—not just in September, but throughout the year.

Moreover, issues like global supply chain disruptions, rising energy prices, and labor market uncertainty also contribute to market anxiety. But while these factors are real risks, they’re not limited to September, and history shows that investors who stay invested for the long term generally fare better than those who try to time the market.

For instance, the 2020 pandemic crash had nothing to do with the September Effect, but those who stayed in the market saw significant gains when the market rebounded in the following months. It’s a reminder that short-term market trends should be considered, but they shouldn’t dictate long-term investment strategies.

Should You Sell Your Stocks in September?

So, should you sell your stocks just because it’s September? Probably not. Historical trends are interesting, but they’re not guarantees. Every year is different, and the market is influenced by a variety of factors, many of which are impossible to predict. The September Effect is real in the sense that it’s statistically significant, but it’s not a death sentence for your portfolio.

In fact, for long-term investors, September’s shaky reputation might be seen as an opportunity. If stocks dip during the month, it could provide a chance to buy strong companies at lower prices. After all, “buy low, sell high” is the golden rule of investing, and seasonal downturns could offer valuable buying opportunities for patient investors. 

Moreover, if you’re already well-diversified and have a solid long-term strategy, reacting impulsively to one month of market behavior might do more harm than good. Panic-selling during September dips can lock in losses, whereas staying the course allows you to weather short-term volatility and potentially come out ahead when the market recovers.

What do you think? Will the September Effect impact your investment strategy? Let me know in through email info@arewaworld.com. And if you want to learn more about navigating the stock market during volatile times, make sure to check out my next article!