Should you buy stocks in September? Here’s what history says.

September is not known to be one of the best months for stocks to perform. During the last century, S&P 500 the index fell on average during this month, a phenomenon known as the “September Effect”. The past four years have continued this trend, with losses between 4% and 9% for the index. So far this year, we’re following that path, with the S&P 500 heading for a more than 3% drop in September — and we’re still early in the month.

The decline in September was broad-based as companies such as retailers general dollarthe technology giant Super Micro Computerand biotechnology company Modern were among the 10 worst performers — with double-digit losses — in the S&P 500 so far. All three of these companies rose in the first months of the year, with Supermicro even up 188% in the first half of the year. Now, as September’s performance unfolds, you may be wondering whether you should buy stocks this month or stay away. Here’s what history says.

Image source: Getty Images.

What is behind the September effect?

First, though, let’s take a quick look at what may be behind the September effect. Analysts speculated that the reason for the declines may have to do with portfolio managers returning from summer vacation and adjusting their portfolios. Another idea is that these managers could do some window shopping — buying or selling certain assets to boost performance — before the end of the year. But no one really knows why stocks typically retreated in September.

Now let’s take a look at what history shows us about this situation. If we look at the losses of the last four years from September, we can see that in the three months that followed, the index advanced. The S&P 500 went on to gain 11%, 10%, 7%, and 11% over the last three months of 2020, 2021, 2022, and 2023, respectively. So recent history tells us that even after a dismal September, the market has returned, advancing even in double digits.

And, even better, if we look at the performance of the S&P 500 over time, for example over the past 10 years, we can see that after each dip — whether in September or at some other point — the index continued to grow significantly.

^ SPX data by YCharts

All this points to one thing. History shows us that the September Effect is a temporary situation and is unlikely to sideline the market for very long. And that tells us that potential declines in September shouldn’t scare us away from the stock market.

Stocks traded at a discount

In fact, now is a fantastic time to get into stocks. This is because many solid players with great long-term prospects are trading at a discount due to recent declines. An example is Nvidia (NVDA 3.54%)the largest maker of artificial intelligence (AI) chips that has grown more than 100% in the past year. The stock has lost about 12% since the start of the month, leaving it trading for 36 times forward earnings estimates. That’s down from nearly 50 times a few months ago.

Alphabet (GOOG -1.57%) (GOOGL -1.33%)owner of Google, makes another great buy on the downside, as the stock now trades for 19 times forward earnings, down from more than 24 times in July. The company dominates the Internet search market and its cloud computing business is growing by double digits.

So history tells us that in recent years, weak Septembers have led to year-end gains — and even if that trend doesn’t repeat itself, we know that over time, the S&P 500 always rides out of tough times. and keep going up. This does not mean that every stock will go up in the future. But if you pick companies with a proven track record and solid future prospects — and even throw in a few unproven newer players that could thrive in the future — you’re likely to win in the long run. And history tells us that now is the perfect time to start or add to this exciting portfolio.