Beware the September effect!
Of all the calendar-related stock market phenomena — like the Santa Claus rally in December or its follow-up January effect of small-cap stock pops — none is as feared as this dreaded annual scourge.
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OK, that may be overstating it, but not by much. September is, in fact, the only month of the year during which both the Nasdaq Composite (NASDAQINDEX: ^IXIC) and the S&P 500 (SNPINDEX: ^GSPC) have a negative average return, finishing the month down more often than not.
This year, the September effect is already happening. The Nasdaq Composite is already down 1.5% for the month, and the S&P 500 is down 1.75%. Some individual stocks are doing even worse: Micron Technology is down 3.4% so far in September!
So, should investors sell their stocks before this September gets any worse? History has a clear answer. Here’s what it says investors should do now.
Practically a coin flip
According to research by The Motley Fool, the September effect is a real phenomenon: The Nasdaq Composite has returned -0.9% on average during that month since 1985. That’s the only month in which it has an average negative return.
For the S&P 500, September has returned an average -0.6% since 1950. It has a negative average return in only one other month: February, with a barely negative average return of -0.03%.
If we look at individual years instead of averages, it’s still bad.
The Nasdaq has had 18 positive Septembers and 22 negative Septembers, the least positive returns (45%) of any month. The S&P has had 34 positive Septembers and 41 negative Septembers, also a 45% percentage.
But that means that even in this “worst of the worst” month, the odds of getting a negative return are only slightly worse than a coin flip. And would you really want to make major investment decisions based on a coin flip?
Don’t miss the rebound
Let’s say you decided to sell your stocks on Aug. 31 each year and avoid the September effect entirely. You’d come out ahead just over half the time.
But you’d need to buy right back in again only a few weeks later, because October has an average 0.9% return on both the Nasdaq and the S&P 500. And November has the highest average return of any month on either index (2.3% on the Nasdaq and 1.9% on the S&P 500)!
