September is bad for stocks but maybe not this time

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The US major indexes are sitting on four straight wins after Wednesday’s rally.

But the month of August will likely print red for the averages after a blistering start to the year through July. While history says September is the worst-performing month of the year by most metrics, there’s good reason to give bulls hope in the four final months of the year, according to Yahoo Finance data.

September is back to school for kids and back to markets for Wall Street, when institutional investors close their books on the illiquid summer. As we wrote several months ago, an old Wall Street adage is perhaps better expressed as, “Hedge in May and go away,” because many large institutional investors attempt to ride out the middle of the year without any major portfolio allocation changes.

That doesn’t always work out. Life, the weather, and market gods, or Fed Chair Jerome Powell, can intervene at any time to force a massive repricing of risk. But this summer was largely on a glide path toward more favorable inflation data and higher stock prices (except the first three weeks of August).

Looking at how the performance of individual months in the S&P 500 has evolved over time is instructive to see what we might anticipate.

September (gray) is the clear negative outlier when looking at the final four months of the year. The chart shows that an investment of $1,000 invested only in the month of September going back to 1960 would be down 40% to $600 by 2022. October (purple) would be up 79% to $1785, measured the same way.

Both those months would look materially better were it not for several negative outlier years. That’s because September and October are prime-time crash season.

The two-month period is a magnet for adverse market shocks to play out, such as Black Monday in 1987, the 9/11 attacks of 2001, and the failure of Lehman Brothers amid the Global Financial Crisis in 2008.

Absent the big market crashes, September would be positive overall and October’s returns would be challenging the elevated returns of November (yellow) and December (blue).

But looking at years similar to 2023 — when stocks are up big by July and then give up gains in August — we find a distinct lack of market crashes, ceteris paribus.

S&P 500 Facing Bullish Seasonal Tailwinds into Year-End

S&P 500 Facing Bullish Seasonal Tailwinds into Year-End

The sample size of only 11 other instances is admittedly small. But this pushes back against broader analyses that find September to be a negative month for stocks historically, if not the worst month overall.

Seasonality studies such as these only account for up to a third of returns. But the weight of the data suggests a rosier outlook than many are predicting for the markets after Labor Day.

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