Investors are heading into the worst time of the year for stocks. Here’s why September is brutal for the market.

• The S&P 500 has a history of underperforming in September.

• Volatility increases in the month as traders reposition their portfolios.

• Several market-moving events could make this September particularly unique.

As August closes out the summer season, the S&P 500 may soon take its own vacation.

On average, September was the benchmark’s worst month since 1928. Not only do stocks regularly underperform, but it’s not uncommon for the market to end the month with a negative return.

According to CME Group data from last year, the S&P 500 has lost ground in 55% of Septembers over the past century. More recently, the index has fallen over the past four years, Deutsche Bank added.

A big culprit is higher trading volume as Wall Street returns to work after Labor Day.

With more traders on vacation during the summer months, equity activity tends to lag, leading to a stronger market performance amid lower trading volumes.

SoFi’s Liz Young Thomas noted that the S&P 500’s monthly trading volume averaged 15.2 billion shares between June and August. But when investors return to their desks in September, volume rises to 17.2 billion shares.

“People come back and start trading again. You just have more activity in the market, which can lead to volatility,” the chief investment strategist told Business Insider, adding, “Naturally, people might take a look. to portfolios and say, “I’m a little overweight Mag Seven, or I’m a little overweight large-cap stocks, or I’m just overweight stocks in general.”

September sees some of the most volatile swings of the year, and 2 percent moves in either direction are the norm for the S&P 500, she said. Although volatility continues throughout the fall, September stands out as the downside swings far outweigh the upside momentum, she said.

What to expect this year

A few market moving events could make this September unique.

For example, all eyes are on the Federal Reserve’s September 18 policy meeting. Interest rate cuts are expected, a move that is generally seen as positive for the bull rally.

However, according to LPL Financial’s Adam Turnquist, that could change based on the upcoming August jobs report due out on September 6.

If the labor footprint is weaker than expected, the Fed could pursue deeper rate cuts, which would be an acknowledgment of a weakening economy.

“If we get a little better economic data next week, the doubt landing narrative gains a little more momentum and potentially we’ll give up the loss we’ve seen in recent years in September,” the chief technical strategist said . Adam Turnquist told BI, but stressed that the downside risk looks more likely.

The story continues

Beyond September, election jitters can only extend seasonal volatility.

SoFi’s Young Thomas noted that volatility spikes in mid-October during election years, not late September.

However, this is frequently followed by a relief rally once the results are known, she said.

How to prepare

Portfolios shouldn’t be readjusted due to seasonal fluctuations, each expert told BI — that’s both hard to forecast and not a long-term fundamental input.

But for those looking ahead to the months ahead, Young Thomas suggested investors pay attention to how the trading environment could soon change.

“You have to sit back and think, ‘Well, what typically works well during a steepening yield curve, falling yields and a falling dollar?’ she said, referring to three outcomes implied by an interest rate cut.

In that context, dividend-paying stocks might be worth it, she said. As yields fall, Treasuries will lose their luster, sending investors looking for other sources of income. Dividend stocks may benefit, she said, adding that they are typically concentrated in utilities and commodities.

Meanwhile, the dollar’s depreciation could boost healthcare, as a slippery greenback should boost exports of medical products, she said. Increased commercial activity would also benefit the aerospace and defense sectors.

Turnquist also noted that investors may do well to buy the seasonal dip.

“Buying the September or October lows was a very good trade,” he said. “In October, things start to pick up, and then you have this year-end rally in November, December, usually very high average returns and high positivity rates for those months.”

Read the original article on Business Insider