September is historically the worst month for U.S. stocks. What investors need to know.
The U.S. stock market finished a turbulent month on a positive note after recovering from a bout of heavy selling on Aug. 5 that plunged Wall Street to its worst day in nearly two years.
But if the past is any guide, seasonal weakness in September could spoil the momentum via a heightened level of volatility in the financial markets.
History suggests September is the worst month of the year in terms of stock-market performance. The S&P 500 SPX has generated an average monthly decline of 1.2% and finished higher only 44.3% of the time dating back to 1928, according to Dow Jones Market Data.
The historical performance of the Dow Jones Industrial Average DJIA and the Nasdaq Composite COMP also indicates stocks could experience a lackluster period in September, with the two indexes delivering an average monthly drop of 1.1% and 0.9%, respectively. The Dow has recorded positive returns in September only 41.7% of the time since 1897, while the Nasdaq has finished higher 54.1% of the time since 1971, according to Dow Jones Market Data.
“The summer vacation cycle ends [in September] and people go back to their desks to trade stocks again. In fact, September is the second-highest month for trading volume of the whole year,” Liz Young Thomas, head of investment strategy at SoFi, said in emailed commentary on Thursday.
Trading volume usually remains light in the summer months, with July and August on average seeing the lowest number of shares changing hands on the New York Stock Exchange, according to FactSet data.
More trading activity can lead to more volatility in the stock market, Young Thomas told MarketWatch in a follow-up interview on Friday. The S&P 500’s strong gains during the summer months of 2024, as well as its quick recovery from the Aug. 5 rout may prompt investors to “reposition” their portfolios after “a period of returns that’s maybe a little bit outsized,” she added.
“If people have been away or haven’t done as much trading as usual through the summer, they come back in September and realize they’ve got a bunch of gains in their equity portion,” Young Thomas said. “You could see people take some gains in September just to get that positioning in the right place.”
Meanwhile, September brings what could be the start of the Federal Reserve’s interest-rate-cutting cycle — if inflation and labor-market data between now and the Fed’s Sept. 17-18 meeting still keeps the door open for rate reductions.
“We are in a period where we’re looking down the barrel of our first rate cut in a very long time … [but] markets are just not quite accustomed to that yet,” Young Thomas noted. “We’ve been hearing [about] rate cuts and been anticipating them in a positive way, but there’s really no guarantee that they will end up being positive for the duration of that cutting cycle.”
Last Friday’s PCE inflation data looked likely to keep the Fed on a path to cutting rates three times this year by 25 basis points each, according to the CME FedWatch Tool. But investors haven’t ruled out the chance of a more aggressive, 50-basis-point cut should this week’s August employment data show further slowing in the labor market.
Adding to potential volatility in the stock market is the upcoming U.S. presidential election. The S&P 500’s historical performance during election years suggests stocks could experience a lackluster and volatile period between now and Nov. 5, Sam Stovall, chief investment strategist at CFRA Research, told MarketWatch last month.
However, portfolio managers at Little Harbor Advisors said there’s no “imminent worry” in the stock market in September as Wall Street’s closely watched “fear gauge,” the Cboe Volatility Index VIX, has been in a free fall after peaking above 65 in early August.
The VIX has fallen 77% since Aug. 5 to remain well below its long-term average of around 20 as of Friday afternoon, according to FactSet data.
“Hedging is something you need to be very careful with, because hedging when nothing’s happening is very expensive,” said Matthew Thompson, portfolio manager at Little Harbor Advisors.
“We prefer to wait until we see signs in the VIX [that it is surging], and that’s where we’re going to start to hedge,” Thompson told MarketWatch on Friday. “You will get a lot of calendar items that could get [the VIX] moving in September, but as of now, we’re just watching and waiting.”
U.S. stocks finished August with monthly gains on Friday. The S&P 500 advanced 2.3% last month, while the Dow gained 1.8% and the Nasdaq rose 0.7% for the month, according to FactSet data.
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