For nearly a century, September has cast a shadow over Wall Street, earning a reputation as the stock market’s worst-performing month.
This phenomenon, dubbed the “September Effect,” has intrigued investors and analysts alike, prompting debates about its validity and impact on trading strategies.
September Effect and the Stock Market
Since 1928, the S&P 500 index has averaged a 1% decline during September, according to historical data.
The “Stock Trader’s Almanac” consistently reports September as the month when leading indexes typically perform poorest. This trend extends beyond U.S. markets, affecting stock exchanges worldwide.
Notable September downturns include the original Black Friday in 1869, significant dips following the 9/11 attacks in 2001, and a sharp decline during the 2008 subprime mortgage crisis.
Over the past 25 years, the S&P 500’s average September return has improved slightly to -0.4%, while the Dow Jones Industrial Average has averaged a 0.8% decline since 1950 during the month.
Despite these long-term trends, experts caution that the effect is not consistent year to year and has shown signs of dissipating in recent times.
Possible Explanations for the September Effect
Financial experts offer various explanations for the September Effect. Some attribute it to seasonal behavioral patterns, such as investors returning from summer vacations and adjusting their portfolios.
Others point to institutional factors, including mutual funds selling holdings to harvest tax losses at the quarter’s end. The phenomenon may also be influenced by individual investors liquidating stocks to cover back-to-school expenses.
However, many economists and analysts now discount the significance of the September Effect. They argue that as awareness of the trend has grown, traders have developed strategies to counteract it, potentially neutralizing its impact.
Some researchers suggest the effect might be a statistical anomaly rather than a predictable market behavior, noting that one month inevitably must perform worst on average.
The phenomenon is widely considered a market anomaly that violates the efficient market hypothesis.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
Disclaimer: The author does not hold or have a position in any securities discussed in the article.