The September Effect: Why It's the Worst Month for Stocks and How to Respond

📉 September: Historically the Worst Month

September is just around the corner. And here's something you need to know: September has historically been the worst performing month for US stocks.

Looking at data since the 1920s, the S&P 500 has averaged a -0.72% decline in September. That's the largest decline of any month. And this isn't just an S&P 500 phenomenon. Over the last 100 years, the Dow Jones, S&P 500, and NASDAQ 100 have all shown September as their worst month.

🤔 Why Is September So Bad?

There are several interesting reasons for this pattern.

1️⃣ Investor Behavior After Summer

After the summer rally, institutional investors often rebalance portfolios or lock in profits heading into year end. Retail investors may also sell positions to free up cash after vacation season or ahead of holiday spending.

2️⃣ Tax and Fiscal Year Timing

In the US and elsewhere, the fiscal year for many mutual funds ends in September. This can prompt tax loss harvesting, and the selling pressure temporarily drags prices lower.

3️⃣ Lower Liquidity

Trading volumes are often lighter in late summer. So when selling picks up in September, it can have an outsized effect on prices due to the thinner market.

4️⃣ Psychology and Self-Fulfilling Effect

Because so many traders and investors know about the "September Effect," they often act on it preemptively. This selling in anticipation of weakness can reinforce the very pattern — a classic self-fulfilling prophecy.

📈 But Watch What Happens After September!

Here's the interesting part. According to Visual Capitalist's graphic, after September's dip, the market typically shows 3-4 months of very solid movement from October through January.

Looking at statistics from the last 75 years, September is a lull, but the following four months show significant gains.

💡 What Should Long-Term Investors Do?

For those of us investing for the long term in broad, solid ETFs, the September Effect doesn't mean much.

In fact, if there's a significant dip in September, that's a great opportunity to accumulate more shares at lower prices!

Focus on Fundamentals

• Overall economic data
• Monetary policy changes (Fed interest rate decisions)
• Corporate earnings reports

These are much stronger indicators of market direction than historical seasonal patterns.

🏦 2024 September Might Be Different

This September, a rate cut is expected. Core PCE inflation data met expectations, reinforcing market hopes for a Fed rate cut in September.

Fed Chair Jerome Powell appears to be considering a cut, though uncertainty remains. Some analysts warn that cutting rates now could overstimulate what appears to be a healthy economy, citing strong GDP growth, robust labor markets, and record corporate cash flow.

🎯 September Investment Strategy Summary

1. Don't panic sell - Don't get swept up by historical patterns
2. View dips as buying opportunities - A chance to buy quality ETFs cheaper
3. Maintain DCA (Dollar Cost Averaging) - Statistically the strongest investment approach
4. Focus on fundamentals - Pay attention to economic indicators and earnings over seasonal patterns

Don't let September scare you out of the market. Instead, prepare to seize opportunities when they arise.