The “September Effect” is officially upon us.
The broader benchmark S&P 500 (SNPINDEX: ^GSPC) has averaged a 1.13% decline in September from 1928 to 2021, according to Yardeni Research, worse than any other month of the year. Over the past 25 years, MacroTrends research says the S&P 500 has averaged a 1.4% decline in September.
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That’s much worse than the S&P 500’s average annual returns and has spooked some investors heading into the fall. History offers a clear answer for how to proceed.
Why have stocks seemingly performed worse in September?
It’s hard to pinpoint why stocks haven’t historically performed as well in September as in other months. August is viewed as a dull month, so that could be one explanation: As institutional investors return from their summer vacations, they begin positioning their portfolios for the end of the year.
If they have done well, they may begin to lock in some gains, as most institutional investors that drive the bulk of flows are measured against the broader market annually. Beating the S&P 500 is one way they can justify charging higher fees, especially at a time when there is much greater and cheaper access to investing.
But if investors have performed poorly, they may start to consider tax harvesting, in which they sell certain positions in their portfolios trading at a loss to offset the taxes they may owe on gains. Ultimately, many experts have examined the September Effect and found no clear theory to explain it, so it could very well be a mere coincidence.
Here is how stocks have performed in September in each of the past five years:
2021: -4.76%
2022: -9.34%
2023: -4.87%
2024: 2.02%
2025: 3.53%
In short, the September Effect occurred from 2021 to 2023, but not so much over the past two years.
Could September also be the worst month to buy stocks?
A study published recently by the financial research site Macrobond examined the median and mean (or average) one-year forward returns of the S&P 500 if you had invested in a specific month of the year. While it didn’t specify the exact time frame for the purchases, other parts of the study date back to 1928.
On a median basis, investing in the S&P 500 in September yielded an 8.7% annual return, which marked the weakest month. On average, investing in September led to a one-year return of 7.9%, placing it slightly above five other months, most of which occurred in the back half of the year.
