Even if the market continues to flounder for the next few weeks, there’s not enough risk to flush you out of your holdings.
With the market suddenly — and measurably — down just since the end of August, investors are understandably worried that this September could live up to its bearish reputation. It’s one of only three months of the year that the S&P 500 tends to lose ground, but with an average loss of nearly 0.9%, it’s also the most painful of those three. Depending on the year, this month has dished out far worse. That’s what makes this year’s early September weakness so concerning; it might be an omen of what’s to come.
Before shedding all of your stocks in a panic, though, you might want to look at all the relevant information surrounding this phenomenon. The best course of action here is arguably doing nothing but ignoring what looks like the beginning of a predictable September swoon.
September’s market statistics
For the record, there’s some truth to September being a bad month for stocks. Since 1950, the S&P 500 has lost ground in 42 of the last 74 Septembers, and it has only mustered gains in 32 of them. The average loss of 3.75% in a down year is also greater than the average gain of 3.25% in an up year. Indeed, going back for a century now, this ill-fated month loses ground more often than it rises.
Some of this tendency and its sizable average losses can be chalked up to coincidentally unlucky timing. For instance, both of the Septembers in the wake of 2000’s dot-com meltdown were rough, but not because the implosion of so many young internet companies just happened to take shape in the autumn of those years. The brunt of 2008’s subprime mortgage meltdown was felt in September of that year as well, but it could have happened just as easily in any other month.
That being said, there is something about the calendar that can play a role in this particular month’s trouble. Back when agriculture was one of the U.S.’s biggest industries, this is when a particular year’s harvest yields would start to become clear, potentially putting a strain on banks involved in farming. Since then, it’s been theorized that the end of summer vacations allows investors to start looking more closely at their portfolios, pricing in any bad news that may have been overlooked until then. It should also be noted that while the U.S. government’s fiscal year officially begins in October, the budget begins being hammered out in the weeks before.
All of these factors (and others) may or may not apply any longer, but to any extent they ever did, they’re now arguably a driving force of a self-fulfilling prophecy that usually turns September into a losing month.
Just don’t let any of it steer you into a short-term decision regarding your long-term positions.
The rest of the story
While September’s down more often than it’s up, there’s a noteworthy detail buried within the data that’s worth drawing out. That is, most of the September sell-offs were followed by similarly big October rallies.
The numbers: In 28 of the 42 September setbacks seen since 1950, the S&P 500 actually logged a gain the following month. The average performance between the beginning of September and the end of October during this 74-year stretch, in fact, is actually a modest gain of 0.14% for the two-month span. Since 1950, there have been only 29 times that the September-October timeframe left the S&P 500 lower rather than higher at the end of it. Indeed, in some of its very worst years, the index snapped back from a terrible September with a great October.
Data source: Collected by author from MoneyChimp. Chart by author.
Said more directly, whatever misery is usually dished out in September is typically unwound the following month (and vice versa, by the way).
Things get even more promising when you stretch this timeframe. For the six months between the beginning of June and the end of November, the S&P 500 has only lost ground 26 times since 1950 versus moving higher in 48 of those years, averaging a gain of 1.76% despite the occasional sell-off.
Granted, a few of those instances were still quite rough. They’re also instances, however, where extraordinary circumstances surfaced without necessarily being linked to the time of year … like being in the middle of a bear market! These very “off” years include 2008’s subprime mortgage debacle and the fallout from 1987’s so-called “Black Monday” event. Prior to that, the last time the entirety of autumn was a downright horrible time for the market was all the way back in 1973, when we were in a recession-driven, inflation-riddled bear market.
In addition to being unpredictable, such routs are also just rare. Trying to anticipate them often does more harm than good by driving you out of the stock market when you should remain in it.
Don’t forget: This is still a bigger-picture, long-term kind of thing
This year could be one of the exceptions, of course. That is to say, September as well as October could prove to be terrible back-to-back months for the broad market. Never say never.
From an odds-making perspective, though, this isn’t likely to be the case. Statistically speaking, any weakness suffered in September is apt to only be a mild nuisance, with that nuisance ceding to the usual year-end bullishness that typically starts taking shape in the latter half of October. The chief causes of catastrophic Septembers just aren’t anywhere on the horizon, with the key contrarian bullish clue being that at least some economists are acknowledging the risk. The fact is, most bear markets and recessions begin when most people don’t expect them.
