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

Historically, September has not been kind to equity investors.

Since 1926, U.S. large-cap stocks have lost an average of 0.9 percent in September, according to Morningstar Direct data.

September is the only month in that nearly century-long period in which investors posted an average loss, according to Morningstar. They saw a profit in all other months.

For example, February saw a positive return of 0.4% on average. While this performance is the second lowest of the 12 months, it still eclipses September’s performance by 1.3 percentage points. July reigns supreme with an average yield of nearly 2%.

The monthly weakness is also true when looking only at more recent periods.

For example, the S&P 500 The stock index lost an average of 1.7 percent 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.

“Starting next week, it will (tend to become) a little bit more negative, seasonality-wise,” Yoder said.

Investors who keep their money in stocks for the long term shouldn’t give up, Yoder said.

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

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

In addition, average returns on U.S. large-cap stocks have been positive in September for half of the years since 1926, according to Morningstar. In other words: they were negative only half the time.

For example, investors who sold out of the market in September 2010 would have given up a 9% return that month — the best monthly performance that year, according to Morningstar.

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

Similarly, investors shouldn’t necessarily accept market highs as truisms, experts said.

For example, the popular adage “sell in May and go” would lead investors to sell off stocks in May and buy back in November. The thinking: November to April is the best six months for stocks.

“History shows that this trading theory is flawed,” Fidelity Investments wrote in April. “Most of the time, stocks tend to post gains throughout the year on average. Thus, selling in May, in general, does not make much sense”.

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

There’s a historical reason stocks often did poorly in September before the early 1900s, McQuarrie said.

It ties to 19^th century agriculture, banking practices and money scarcity, he said.

At the time, New York achieved dominance as a powerful banking center, especially after the Civil War. Deposits came into New York from the rest of the country during the year as farmers planted their crops and farmers’ purchases piled up in local banks, which could not use the funds locally, McQuarrie said.

Banks in New York would lend funds to stock speculators to make a profit on these deposits. Early in the fall, country banks drew balances in New York to pay farmers for their crops. Speculators were forced to sell their stocks as New York banks bought back the loans, sending stock prices down, McQuarrie said.

“The banking system was very different,” he said. “It was systematic, almost annually, and the money was always raised in September.”

The cycle ended in the early 20s^th century with the creation of the Federal Reserve, the US central bank, McQuarrie said.

September’s losing streak is somewhat more puzzling in modern times, experts said.

Investor psychology is perhaps the most important factor, they said.

“I think there’s an element of these narratives that feed on themselves,” JP Morgan’s Yoder said. “It’s the same concept as a recession narrative that breeds a recession. It enters the psyche.”

There are likely other contributing factors, she said.

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

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

Investor uncertainty over the outcome of November’s US presidential election and the Federal Reserve’s policy meeting next week, during which officials are expected to cut interest rates for the first time since the start of the Covid-19 pandemic, could exacerbate the weakness 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 psychological,” McQuarrie said.