When it comes to equity markets, the month of September has a bad rap. And as the iconic band, Green Day stated, “Wake me up when September ends” seems to be a prevalent mindset among investors. So, what statistics drive this narrative? For starters, based on the Dow Jones Industrial Average, September is the only month that has averaged a decline over the last 100, 50, and 20 years. In addition, over the previous 40 years, the S&P 500 has averaged a decrease of almost -1.0% during the month. So, there is undoubtedly data to support the September pessimism.
But what causes this, and is it real? Some experts argue the seasonal effect likely started due to mutual funds, whose financial years often end in October. Therefore, the thought goes that in September, the fund managers get rid of the underperforming securities in their portfolios ahead of reporting. Similarly, fund managers return from summer holidays, re-evaluate their portfolios, and make changes in September. Other experts argue that September’s performance isn’t grounded in tangible evidence but is based on emotional or cognitive factors, suggesting the drop in market performance results from investors’ belief in the September Effect rather than the effect itself. Regardless, any of these could affect the performance of markets.
So why wouldn’t you sell in September and buy back in October? First of all, we know that just because something has happened historically does not mean it will continue. Second, even though the returns on average are negative, equity market returns have still been positive almost half the time. And lastly, there are always nuances to every piece of information. For instance, the 20 years from 2001 to 2020, which averaged a decline of -0.8% per year, would seem to illustrate how bad September is for investors. However, we know there were multiple significant historical events over those 20 years in the month, including the September 11 terrorist attacks and the collapse of Lehman Brothers. I think it’s safe to say neither of those things happened because of what month the calendar showed. And when you exclude those two from the 20-year period, the average return moves from -0.8% to +0.1%.
All of this goes to show that what happens in the market is a function of thousands and thousands of variables, all of which are hard to forecast and some of which are not even known ahead of time. And while we have just wrapped up another difficult September, I think it’s safe to say it wasn’t because we were in the ninth month of the year. Perhaps it’s more likely attributable to rising interest rates and a hawkish Federal Reserve. But I’ll let you be the judge. Here’s to a happy October!
Economy
- It was a mixed week for equity markets to end the month, with the S&P 500 down -0.7%, the Nasdaq up 0.1%, and the small-cap Russell 2000 up 0.5%. The best news of the week came on Friday as Core PCE came in below expectations, but still, the markets remained sluggish.
- Core PCE prices in the U.S., which exclude food and energy, increased by 0.1% MoM in August, the least since November 2020 and below market expectations of a 0.2% rise. The annual rate, regarded as the Federal Reserve’s preferred measure of inflation, eased as anticipated to 3.9%, the lowest since May 2021.
- The U.S. economy grew at an annualized rate of 2.1% in the second quarter, unchanged from the previous estimate and compared to an upwardly revised 2.2% growth in the first quarter. Consumer spending rose much less than initially expected (0.8% vs. 1.7% in the second estimate).
- The number of Americans filing for unemployment benefits edged higher by 2K to 204K for the week ending September 23, well below market expectations of 215K to remain close to the over-seven-month low in the earlier week.
Stocks
- U.S. equities were in negative territory. Utilities and Consumer Staples led the decline, while Energy and Materials outperformed. Growth stocks led value stocks, and small caps beat large caps.
- International equities closed lower for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased 13 basis points to 4.57% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
