- September historically poses challenges for the stock market, with the S&P 500 often undergoing correction.
- The poor performance during this period can be because of psychological and economic factors.
- In this piece, we'll discuss how investors can prepare their portfolios to navigate potential market volatility.
- For less than $8 a month, InvestingPro's Fair Value tool helps you find which stocks to hold and which to dump at the click of a button.
September is often considered the most challenging month for the stock market, and several economic, psychological, and strategic factors contribute to this trend. Let’s delve into the historical data to understand why.
September's Historical Performance
- 1928-1950
During the Great Depression and World War II, the market experienced significant volatility. Historically, September closed lower about 60% of the time. Between 1928 and 1950, the S&P 500 posted an average return of roughly -0.5% in September.
- 1951-1980
The post-war economic boom did not spare September. Despite new economic cycles, the S&P 500 continued to underperform, with an average monthly return of -0.3% and a decline rate of 55% during this period.
- 1981-2023
In recent decades, September has maintained its negative trend, with the S&P 500 averaging a -0.4% return. The impact of financial crises and market crashes has been substantial. Since 2000, September has closed in the red about 52% of the time, with an average monthly return trend of -1.1%.
From 1928 to 2022, September stands out as the month with the most negative average return. The S&P 500 saw positive returns in September only 40% of the time, making it statistically the worst-performing month of the year.
Why Does the Market Struggle in September?
Several factors come into play during this time of the year.
- Psychological Factors:
After summer vacations, investors often rebalance portfolios, leading to increased selling and market declines. Anticipation of third-quarter results and planning for the year’s final quarter can also heighten volatility.
- Economic Factors:
Institutional investors frequently adjust their portfolios at the end of the third quarter, leading to more selling. Uncertainty around earnings announcements and upcoming monetary decisions in October can further contribute to September’s volatility.
- Trading Strategy:
The "Sell in May and Go Away" strategy, which reflects seasonal market trends, often sees investors returning to the market in September. This influx can create initial turbulence, adding to bearish pressures.
- Macroeconomic Events:
September often features key central bank meetings, such as the Federal Reserve’s on September 18. Decisions on interest rates and other monetary policies can impact market volatility, with initial rate cuts potentially not being market-friendly.
From 1950 to 2022, September had a closing decline rate of 57%, with an average return of about -0.7% and a standard deviation of 5.1%. This data underscores the higher volatility of September compared to other months.
What You Should Do
September has a reputation for being a tough month for the stock market, but don’t let that scare you. Instead, use it as an opportunity to refine your strategy. Here’s how to navigate the potential rough waters:
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Diversify: You don’t need to be Warren Buffett to benefit from diversification. Spreading your investments can help reduce risk and soften the impact during downturns.
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Play Defense: Think about investing in less cyclical sectors like utilities and consumer staples (NYSE:XLP). These areas tend to hold up better when the market isn’t performing well.
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Watch for Fundamentals: Quality matters, even in a challenging market. Look for stocks with strong fundamentals, as they often stand out and offer value over the long term.
Conclusion
While September’s track record isn’t stellar, it’s just one piece of the puzzle. Focus on building strategies that not only capture market returns but also withstand tough times and support your long-term goals.
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Disclaimer: This article is written for informational purposes only. It is not intended to encourage the purchase of assets in any way, nor does it constitute a solicitation, offer, recommendation or suggestion to invest. I would like to remind you that all assets are evaluated from multiple perspectives and are highly risky, so any investment decision and the associated risk is at the investor's own risk. We also do not provide any investment advisory services. We will never contact you to offer investment or advisory services.