As we head into September, investors may start feeling a bit uneasy as historical data shows that this particular month tends to be rough on stock returns. According to Morningstar Direct, since 1926, U.S. large-cap stocks have lost an average of 0.9% in September, making it the only month with an average loss over almost a century. This trend continues even in recent times, with the S&P 500 stock index averaging a 1.7% loss in September since 2000, the worst monthly performance by more than a percentage point according to FactSet.
But before you panic and consider pulling out of the market, it’s essential to remember that trying to time the market is a losing bet. Financial experts agree that it is nearly impossible to predict when good and bad days will occur, making market timing a risky strategy. In fact, the 10 best trading days by percentage gain for the S&P 500 over the past three decades all occurred during recessions, highlighting the unpredictability of market movements.
While September may have a historically weak track record, it’s essential to take a long-term view when it comes to investing in stocks. Despite the negative average returns in September, large-cap U.S. stock returns were positive for half the years since 1926. This means that investors who sold out of the market in September during positive years would have missed out on potential gains.
It’s also crucial to debunk market maxims such as “sell in May and go away,” as these trading theories often have flaws. Selling out of stocks based on these sayings may not align with historical data that shows gains throughout the year, on average. As Edward McQuarrie, a professor emeritus at Santa Clara University, aptly puts it, “It’s all just random.”
The historical reason for September weakness can be traced back to 19th-century banking practices and the dominance of New York City as a banking hub. Before the creation of the Federal Reserve in the early 20th century, stock prices tended to fall in September due to the cyclical nature of banking practices and the scarcity of money.
In modern times, investor psychology seems to play a significant role in September’s performance. Market narratives can feed on themselves, leading to trends like a September losing streak. Additionally, mutual funds often engage in tax loss harvesting near the end of the fiscal year, potentially pulling forward tax-oriented stock sales into September.
As we navigate through another September with uncertainty surrounding the U.S. presidential election and upcoming Federal Reserve policy meeting, it’s essential to stay focused on your long-term investment goals. While September may have a historical pattern of weakness, understanding the psychological factors at play can help investors remain calm during turbulent times in the market. Remember, markets don’t like uncertainty, but with a solid investment strategy and a long-term perspective, you can ride out September’s volatility.