Why stocks are falling in September – and many investors shouldn’t care

Historically, September has not been kind to stock investors.

U.S. large-cap stocks have lost an average of 0.9% in September since 1926, according to data from Morningstar Direct. A

According to Morningstar, September is the only month in that nearly century-long period when investors suffered an average loss. In all other months they saw gains.

February, for example, had an average positive return of 0.4%. Although this performance is the second lowest of the twelve months, it still exceeds September’s by 1.3 percentage points. July reigns with an average return of almost 2%.

The monthly weakness also applies if we only look at more recent periods.

For example the S&P500 The stock index has lost an average of 1.7% in September since 2000 – its worst monthly performance by more than a percentage point, according to FactSet.

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Historically, the last two weeks of September are generally the weakest part of the month, said Abby Yoder, U.S. equity strategist at JP Morgan Private Bank.

“The time will start next week [tend to get] becoming a little more negative, in terms of seasonality,” Yoder said.

Investors who keep their money in stocks for the long term should not post bail, Yoder says.

Trying to time the market is almost always a losing bet, according to financial experts. That’s because it’s impossible to know when good and bad days will occur.

For example, the 10 best trading days for the S&P 500 over the past three decades, as measured by percentage gains, all occurred during recessions, according to a Wells Fargo analysis published earlier this year.

Moreover, average U.S. stock returns in September have been positive for half the years since 1926, according to Morningstar. In other words, they were negative only half the time.

To illustrate, investors who sold out in September 2010 would have missed out on a 9% return that month – the best monthly performance that year, according to Morningstar.

“It’s all random,” says Edward McQuarrie, a professor emeritus at Santa Clara University who studies historical investment returns. “Stocks are volatile.”

Likewise, investors shouldn’t necessarily accept market maximums as truth, experts say.

For example, the popular saying “sell in May and walk away” causes investors to sell their shares in May and buy them back in November. The thinking: November to April is the best six-month rolling period for stocks.

‘History shows that this trade theory is flawed’ wrote Fidelity investments in April. “More often than not, stocks tend to post gains on average throughout the year, so selling in May generally doesn’t make much sense.”

Since 2000, the S&P 500 has returned an average of 1.1% between May and October, according to FactSet over the six-month period. The stock index rose 4.8% from November to April.

There’s a historical reason why stocks tended to do poorly in September before the turn of the 20th century, McQuarrie said.

It ties in with 19^e century agriculture, banking practices and the scarcity of money, he said.

At the time, New York City had achieved a dominant position as a powerful banking center, especially after the Civil War. Deposits flowed into New York from the rest of the country during the year as farmers planted their crops and farmers’ purchases piled up at local banks, which couldn’t put the money to good use locally, McQuarrie said.

Banks in New York would lend money to stock speculators to earn returns on those deposits. In early fall, New York’s country banks withdrew deposits to pay farmers for their crops. Speculators had to sell their shares when New York banks defaulted on the loans, causing stock prices to fall, McQuarrie said.

“The banking system was very different,” he said. “It was systematic, almost annual, and it always came tight in September.”

The cycle ended in the early 1920s^e century with the creation of the Federal Reserve, the U.S. central bank, McQuarrie said.

September’s losing streak is a bit more baffling in modern times, experts say.

Investor psychology may be the most important factor, they said.

“I think an element of these stories feeds on themselves,” says JP Morgan’s Yoder. “It’s the same concept as a recession story causing a recession. It gets into the psyche.”

There are likely other contributing elements, she said.

For example, mutual funds generally sell shares to capture gains and losses for tax purposes – called “tax loss harvesting” – near the end of the fiscal year, usually around October 31st. Funds often start providing capital gains tax estimates to investors in October.

Mutual funds appear to be “bringing forward” these tax-oriented stock sales to September more often, Yoder said.

Investor uncertainty about the outcome of November’s US presidential election and next week’s Federal Reserve policy meeting, in which officials are expected to cut interest rates for the first time since the start of the Covid-19 pandemic, could weakness worsen in September, Yoder said.

“Markets don’t like uncertainty,” she said.

But ultimately, “I don’t think anyone has a good explanation for why the pattern continues other than a psychological one,” McQuarrie said.