Stock market trends in September have historically been a cause for concern among investors. The data shows that U.S. large-cap stocks have experienced an average loss of 0.9% in September since 1926, making it the only month with a negative average return over nearly a century. This trend is consistent even when looking at more recent periods, with the S&P 500 stock index losing an average of 1.7% in September since 2000, marking it as the worst performing month by more than a percentage point.
Understanding Historical Trends
When analyzing the historical trends of the stock market, it’s important to note that September has consistently been a challenging month for investors. According to data from Morningstar, large-cap U.S. stocks have shown a negative average return in September since 1926, contrasting with positive returns in all other months. For instance, February has seen a positive average return of 0.4%, making it the second-lowest performing month among the twelve, but still surpassing September by 1.3 percentage points. On the other hand, July stands out as the best-performing month with an average return of almost 2%.
Moreover, the last two weeks of September have historically been the weakest part of the month for the stock market. Abby Yoder, U.S. equity strategist at J.P. Morgan Private Bank, highlights that this period tends to exhibit more negative trends in terms of seasonality. This observation underscores the importance of closely monitoring market behavior during this time.
The Pitfalls of Timing the Market
Despite the downward trends seen in September, financial experts caution against trying to time the market. Yoder emphasizes that investors holding their money in stocks for the long-term should resist the urge to bail out based on short-term fluctuations. Attempting to forecast market movements is generally deemed a losing bet, as it is nearly impossible to predict when good or bad days will occur.
A Wells Fargo analysis published earlier this year revealed that the ten best trading days by percentage gain for the S&P 500 over the past three decades occurred during recessions. This data underscores the unpredictability of market movements and the futility of trying to time the market. While September may historically show negative trends, it is essential to consider the broader context of long-term investment strategies.
The Fallacy of Market Maxims
Investors often rely on market maxims or popular trading theories to guide their investment decisions. One such adage is “sell in May and go away,” suggesting that investors should sell stocks in May and buy back in November to benefit from the best rolling six-month period for stocks. However, Fidelity Investments has pointed out flaws in this trading theory, noting that stocks tend to record gains throughout the year on average.
According to FactSet data, the S&P 500 has seen gains of 1.1% from May to October on average, over a six-month period since 2000. In comparison, the stock index gained 4.8% from November to April. These findings challenge the validity of market maxims and emphasize the importance of conducting thorough research before making investment decisions based on popular beliefs.
Psychological Factors Impacting September Trends
The consistent weakness observed in September’s stock market performance has puzzled experts in modern times. One significant factor contributing to this trend is investor psychology. Abby Yoder notes that narratives surrounding market behaviors can become self-perpetuating, influencing investor sentiment and decision-making. The psychological aspect of investing plays a crucial role in shaping market trends, as narratives and perceptions can impact market movements.
Mutual funds also play a role in influencing market behavior in September. Yoder highlights that mutual funds often engage in tax loss harvesting near the end of the fiscal year, typically around October 31. This practice involves selling stocks to lock in profits and losses for tax purposes, potentially leading to increased selling pressure in September. The phenomenon of mutual funds “pulling forward” tax-oriented stock sales into September further contributes to the month’s historically weak performance.
Investor uncertainty surrounding external factors such as the U.S. presidential election in November and the upcoming Federal Reserve policy meeting may exacerbate weaknesses in September’s market performance. Yoder points out that markets are averse to uncertainty, which can lead to increased volatility and fluctuations in stock prices. Despite efforts to rationalize September’s market trends, the psychological and behavioral aspects of investing remain significant drivers of market behavior.
In conclusion, while September has historically been a challenging month for stock investors, it is essential to approach market trends with a long-term perspective. Attempting to time the market or base investment decisions on popular beliefs may not yield favorable outcomes. By understanding the historical trends, psychological factors, and market dynamics at play in September, investors can make informed decisions that align with their financial goals and risk tolerance.