The exchange is poised to do so for the first time in 5 years. History says this continues to happen

September is usually a terrible month for the stock market.

In fact, it is historically the worst month of the year due to what is sometimes known as the September effect. From 1928 to 2023, S&P 500 averaged a decline during September — even as the overall market index delivered an average annual return of 9%, meaning its return excluding September is even stronger.

There is no clear reason for the regular sale. It could be related to traders adjusting their positions after the summer holidays, profit taking before a new school year, or some other under-the-radar seasonal factor.

However, not every September is a downside for investors. This year looks set to break the historical pattern, as the S&P 500 just set another all-time high.

Through September 25, the S&P 500 was up 1.4% for September so far. In fact, all three major indexes are up for the month, as the chart below shows.

Stocks were helped by the Fed’s 50 basis point cut in interest rates, while a broader debate is taking place over the strength of artificial intelligence (AI) stocks. In particular, the Nasdaq it still hasn’t returned to July’s record, but it’s getting close.

The S&P 500 hasn’t posted a gain in September since 2019, even though the index has been in the middle of rallies in three of those four years (2020, 2021 and 2023 saw the index post strong returns). In some years, this performance has been particularly poor. Last year, for example, the market index fell 5% in September, the worst month of the year. The Fed cut its earlier forecasts for a rate cut as inflation remained sticky.

In 2022, it fell 9% and dropped 4% in both 2020 and 2021.

Given this pattern, September’s gains look significant.

What history says about September wins

Since 2009, the S&P 500 has gained seven times in September. On five of those occasions, the S&P 500 continued to rise in the fourth quarter, as the table below shows.

Source: YCharts, data compiled by the author.

As you can see, there was only one year where the S&P 500 underperformed after winning in September. That was in 2018. That year, the Fed’s rate hikes sent bond yields soaring, weighing on stock valuations, and fears of a trade war with China spread.

However, the general trend seems to be that September gains tend to lead to solid gains in the fourth quarter. In five of the seven years above, the S&P 500 gained more than 5%, or an annual gain of more than 20%.

The story continues

Will the S&P 500 rise in Q4?

There are a number of factors that will influence the performance of the S&P 500 in Q4, including corporate earnings, Fed rate cuts, the presidential election, holiday spending and other unknown developments and factors.

It’s impossible to know for sure how the S&P 500 will fare in Q4, but the momentum in the index is promising, especially during a normally weak month for stocks.

Ultimately, investors are better off focusing on the long term. Remember that the S&P 500 has grown at a compound annual rate of 9%, with dividends reinvested throughout its history.

While there is no guarantee that the index will gain in Q4, the dynamism of the US economy should ensure that the S&P 500 remains a winning ticket for long-term investors.

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Jeremy Bowman has no position in any of the listed stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The exchange is poised to do so for the first time in 5 years. History Says This Is What Happens Next was originally published by The Motley Fool