Understanding the "September Effect"

Understanding the "September Effect"

September 04, 2023

With September upon us, we wanted to discuss something you may have heard about - the "September Effect." If you ask the average investor which month is the most volatile for the stock market, they will probably say October. And while it is a reasonable answer, September can be equally as volatile.

Despite October's reputation for market-defining events like the federal bank bailout at the start of the Great Recession in 2008, over the last 25 years, September returns on the Standard & Poor's 500 stock index have been worse. This phenomenon has become known as the "September Effect." As you can see in the chart below, this isn't just a U.S. market anomaly but a global trend that has affected stock markets worldwide.


Multiple Causes for the September Effect


While statistics show that September is more volatile, much of the theory about the September Effect is anecdotal.

Here are a few examples:

  • Election Season—September usually begins the U.S. election cycle, which can cause investors to reposition their portfolios if they anticipate a power shift in Washington, D.C. While the September Effect isn't limited to U.S. markets, U.S. elections can have a ripple effect worldwide. With the midterm election behind us and the 2024 presidential election a year off, the election's impact may be more muted this year.
  • Politics may still play a role in 2023 - both the House and the Senate will return from their August breaks and will have a few weeks to try to pass spending bills before the end of the current fiscal year on September 30. There may be some headline impact in September regarding the risk of a government shutdown on October 1. Markets may react as they did during the debt ceiling negotiations earlier this year.
  • Seasonal Rebalancing—At the end of summer, children return to school, vacations end, and investors start to position themselves for the final quarter. As portfolio managers look to the new year, trading volume tends to increase in September. In addition, institutions and other large investors may need to update their portfolios for year-end reporting. This extra layer of trading can lead to an upswing in volatility.
  • Market Psychology—While market psychology and investor sentiment are hard to quantify, they may be among the likeliest causes of the September Effect. Stocks may be volatile in September because investors expect them to be. The follow-the-herd mentality is hard to resist, especially for some investors. As a result, the September Effect can become a self-fulfilling prophecy.

Wall Street Maxims


If stocks drop this month, it will be another data point to bolster those who believe in the September Effect. But should you use that belief or other well-known stock market folklore to improve your investment returns? History says no.

Some investors swear by Wall Street adages, like "Sell in May and go away," "Don't fight the Fed," and "Never try to catch a falling knife." The problem is that many clichés revolve around trying to time the markets. One investment saying that has merit is "It's time in the market, not timing the market."

A landmark study by Dalbar (2023) showed that equity investors posted an average annualized return of 6.81% for the 30-year period ending on December 31, 2022. While that may sound strong, it's far below the 9.65% return of the Standard & Poor's 500 Index for the same period. Put into dollar terms, after 30 years, an investor's original investment of $100,000 increased to almost $722,000, but the same investment in the S&P 500 would have been worth nearly $1.6 million, or more than double. The below illustration is an example of what can happen over the long term. Remember that it's unlikely that a portfolio would be a 100% investment in the S&P 500.


(Dalbar's Quantitative Analysis of Investor Behavior Report, 2023: April 3, 2023.)

The bottom line - an individual can be their own worst enemy when it comes to investing. Remember, when you time the market, you must be correct twice—once when leaving the market and once when deciding to reinvest.


Stick with Your Strategy


Market timing is a challenge because some of the most significant gains happen when you would least expect them, while some of the worst days occur when everything seems to be going great. We would all love to miss the worst market days, but it's difficult to avoid them and still capture the best ones.

So, don't worry about things you can't control, like the September Effect. Your investment strategy should reflect your goals, time horizon, and risk tolerance. Furthermore, your financial advisor's approach should consider market fluctuations and volatility.


Please do not hesitate to contact our office if you have questions or want to check-in. We are happy to walk you through our approach and explain what we are doing to keep you on track to meet your financial needs and goals. We look forward to hearing from you and hope you have a wonderful week!