Why Do Stocks Go Down in September? Understanding the Mysterious September Effect

Have you ever noticed that your stock portfolio seems to take a hit when the kids go back to school? You’re not imagining things! September has historically been the worst month for stocks, and I’ve always wondered why my investments seem to struggle during this particular month. Let’s dive into this fascinating market phenomenon known as the “September Effect” and explore why stocks often go down during this fall month.

What Is the September Effect?

The September Effect refers to the historical trend where stock market returns tend to be weaker during September compared to other months of the year. As someone who’s been investing for years, I’ve definitely noticed this pattern in my own portfolio!

This market anomaly is particularly interesting because it seems to violate the fundamental assumption of efficient markets. In theory, markets should be unpredictable, yet September has consistently underperformed over the long term.

Some key facts about the September Effect:

• From 1928 through 2023, the S&P 500 has averaged a decline during September
• September is historically the worst-performing month for stocks over the past century
• Stocks have been down in September about 55% of the time since 1928
• While the average return for September is negative, the median return has actually turned positive in recent years

Is the September Effect Really Real?

Before we dive deeper let’s address the elephant in the room Is this effect actually real or just a statistical fluke?

The truth is, it depends on who you ask and what timeframe you’re looking at Most economists and market professionals generally discount the September Effect as a reliable indicator Here’s why

1. Time period matters: If you had bet against the market every September for the past 100 years, you would have made an overall profit. However, if you only did this since 2014, you would have lost money.

2. Statistical quirk: One month has to be the worst, and it happens to be September when looking at long-term averages.

3. Recent changes The median return for September has actually turned positive in recent years, suggesting the effect might be fading.

4. Not predictive: Even if the pattern exists, it doesn’t necessarily help predict what will happen in any specific September.

As an investor, I’ve learned that these kinds of market anomalies make for interesting conversation but aren’t necessarily the best foundation for investment decisions!

Why Do Stocks Typically Fall in September?

Let’s explore some of the most common theories about why September tends to be rough for stocks:

1. The Post-Summer Portfolio Adjustment

After summer vacations end, investors return to their desks and reassess their portfolios. Many decide to lock in gains and tax losses before the end of the year, leading to increased selling pressure.

2. Education Expenses Trigger Selling

Many parents need extra cash for back-to-school expenses and college tuition payments, which fall due in September. This might cause some individual investors to liquidate stock positions to cover these costs.

3. Self-Fulfilling Prophecy

Because investors expect the September Effect to happen, market psychology takes hold, and negative sentiment leads to selling. Basically, we expect stocks to go down, so we sell, which causes stocks to go down!

4. Institutional Trading Patterns

September marks the end of the third quarter, and many institutional investors make portfolio adjustments during this time:

• Mutual funds may cash in holdings to harvest tax losses
• Portfolio managers might lock in profits before year-end reporting
• Institutional repositioning can create downward pressure on stocks

5. Pre-Positioning in August

In recent decades, some investors have started selling in August to get ahead of the September Effect. This may explain why the effect seems less pronounced in recent years.

The September Effect vs. The October Effect

The September Effect is often confused with the October Effect, which is another calendar-based market anomaly. Here’s how they compare:

Both effects lack a clear causal link and may simply be statistical anomalies rather than reliable market patterns.

Has the September Effect Changed Over Time?

The data suggests the September Effect might be evolving:

• Before 1990: Frequent large declines occurred in September
• After 1990: The effect seems less pronounced
• Recent years: Median returns have turned positive, though average returns remain negative due to historical extremes

This evolution might be due to investors becoming more aware of the pattern and adjusting their strategies accordingly. As someone who follows the markets closely, I’ve noticed that these kinds of widely-known patterns tend to weaken once everyone starts trying to take advantage of them!

Should You Adjust Your Investment Strategy for September?

As a regular investor who’s seen my fair share of market ups and downs, here’s my take on whether you should change your strategy based on the September Effect:

Arguments Against Changing Strategy:

1. Market timing rarely works: Most research shows that trying to time the market based on patterns like this usually leads to worse returns than staying invested.

2. The effect is inconsistent: While September has been down 55% of the time, that’s only slightly worse than a coin flip.

3. Recent data is mixed: The September Effect appears to be weakening in recent decades.

4. Transaction costs: Selling in August and buying back in October would incur trading costs and potential tax consequences.

Limited Adjustments to Consider:

If you’re still concerned about September volatility, here are some moderate approaches that don’t involve completely exiting the market:

1. Avoid major buys in late August: Maybe hold off on making large new investments right before September.

2. Maintain adequate cash reserves: Having some cash on hand lets you take advantage of any September dips.

3. Rebalance if needed: September might be a good time to reassess your portfolio allocation and make adjustments.

4. Long-term focus: Remember that monthly fluctuations matter little in a decades-long investment horizon.

Recent September Performance

It’s worth noting that the September Effect isn’t consistent every year. Let’s look at some recent Septembers:

• During the pandemic years, September performance varied significantly
• Some recent Septembers have actually shown positive returns
• Individual stocks and sectors can perform very differently from the overall market

As with any market “rule,” exceptions abound, and past performance never guarantees future results.

The Bottom Line: Should You Worry About the September Effect?

After diving deep into the September Effect, here’s my conclusion: while historically September has been the worst month for stocks, the effect is probably not something that should drive your investment decisions.

The September Effect is a fascinating historical market anomaly, but its statistical evidence varies significantly depending on the time period analyzed. Recent data even shows that median returns in September have turned positive, suggesting the effect might be fading.

As with many supposed market patterns, once they become widely known, investors adapt their behaviors, which often causes the patterns to disappear. Markets tend to be quite efficient, especially after anomalies are identified and publicized.

My personal approach? I’m aware of the September Effect, but I don’t drastically change my investment strategy because of it. Instead, I focus on:

• Maintaining a diversified portfolio
• Investing regularly throughout the year
• Keeping a long-term perspective
• Having some cash available to take advantage of any market dips, regardless of the month

If you’re really concerned about September volatility, perhaps consider smaller adjustments like postponing major purchases or ensuring you have adequate cash reserves, rather than completely changing your investment approach.

Remember, investment success is typically determined by time in the market, not timing the market. Whether it’s September, October, or any other month, staying focused on your long-term financial goals is usually the wisest approach.

So next time September rolls around and you see stocks trending down, you’ll know that you’re witnessing a fascinating historical pattern—but you won’t panic because you understand what might be driving it!

Have you noticed the September Effect in your own portfolio? I’d love to hear about your experiences in the comments below!

The “7% rule” for stocks is a risk management strategy that dictates selling a stock when it drops 7% below the purchase price to limit losses and preserve capital. This rule, popularized by investors like William O’Neil, is based on the observation that even strong stocks typically don’t fall more than 7-8% below their ideal buy point. It can be implemented by setting a stop-loss order with your broker or through manual monitoring. Another related, but distinct, “7% rule” is a retirement planning concept where you assume a 7% annual withdrawal rate from your investments to determine how much you need to save for retirement, as explained in this YouTube video.

September is historically the worst-performing month for stocks, while October is known for high volatility and has been the month of several major market crashes.