In the United States, September means a lot of things, like the beginning of school and, most importantly, football season. It’s also known for being a terrible month for the stock market.
But maybe not this year. Bloomberg says that U.S. stocks were on track to end the month of September stronger for the first time in five years as of Friday.
It’s clear that this is not following a well-known past trend. After all, September is always the worst month for the market. In fact, Dow Jones data going back almost one hundred years shows that the S&P 500 SPX -0.19% has had an average September return of -1.2%. Other big indexes have had similarly bad months, as the chart below shows.
The stock market is about to avoid another “bloodbath” in September.
These losses have been especially bad in the last few years, which has helped September’s image for being scary. FactSet says that the S&P 500 dropped more than 9% in September 2022 and almost 5% in September 2023. Also, the sales in 2021 and 2020 were much bigger than usual.
Ross Mayfield, a financial strategist at Baird, told MarketWatch on Friday that the last four Septembers have been “a bloodbath” for stocks.
But investors don’t seem to be worried about the past this year. Thomas Martin, senior portfolio manager at GLOBALT Investments, said that the big 50-basis-point interest rate cut by the Federal Reserve has helped them believe in the economy again.
So far this month, the S&P 500 has gone up 1%. This means that September will be the best month for stocks since 2019, which was the last time those months went up. The Dow Jones Industrial Average DJIA 0.09%, which went up 1.6% this month, has the same story. Dow Jones data shows that the Nasdaq Composite’s COMP -0.36% gain of 1.5% puts it on track for its best September since 2016.
In 2024, stocks have gone up a lot, but the market stopped going up in early August and again in early September because investors were worried that the U.S. economy was slowing down faster than they thought.
This, along with a sharp end to the Japanese yen USDJPY -0.02% carry trade, made August 5 the worst day for stocks in two years. The market quickly got back to normal, but it wasn’t long before it was down again. The S&P 500 had its worst weekly drop since November 2023 at the beginning of September.
Stocks got better after the Fed cut rates, but there may be more instability ahead.
Martin said that the Fed’s move to do decisive easing this week has probably helped calm people down.
“This year is different for sure.” “A Fed easing cycle is something you haven’t really had in a long time,” Martin told MarketWatch in an interview. “It’s not hard to figure out that this is why you got this rebound.”
But it’s possible that more weakness is on the way. Mayfield said that he thinks stock prices will go through more wild swings like the ones we’ve seen in the last two months.
One thing that could cause short-term changes in market prices is the upcoming U.S. presidential election, especially if the results are too close to call at first or if the outcome is disputed, like it was in 2000.
Matt Thompson, co-portfolio manager at Little Harbor Advisors, says that traders are getting ready for this kind of risk because the prices of futures contracts tied to the Cboe Volatility Index VIX -1.10%, also known as the VIX or Wall Street’s “fear gauge,” are very high.
There is also still economic data coming in that could make people doubt that the Fed’s rate cuts will stop the job market from getting even weaker. However, Mayfield said that investors would be more worried about any signs that inflation is rising again.
Pay close attention to new economic facts.
Both Mayfield and Martin said they’ll be paying close attention to new numbers on GDP growth, inflation, and jobless claims that come out next week, no matter what happens.
In the end, these numbers could show whether stocks keep their monthly gains or give them up.
Traders have good reason to think that there will be more shocks before the end of the month. Based on what we know from the past, the worst part for stocks might still be yet to come. Ever since 1950, the second half of September has been the worst two weeks for stocks in the whole year, according to Ed Clissold of Ned Davis Research.
Also, keep in mind that the math is a little different during election years. Carson Group’s Ryan Detrick says that losses in October have tended to be higher than losses in September every four years.
Short-term swings could cause investors’ portfolios to lose money for a short time, but stock-market analysts don’t think investors need to worry about a longer-term pullback. FactSet data show that Wall Street analysts think company earnings will grow by more than 10% in 2025. This could help to explain why stock prices are higher than their recent historical averages.
This is one reason why Brian Belski of BMO raised his year-end target for the S&P 500 to 6,100 earlier this week. This is now the biggest target on Wall Street.
Others included data that showed stocks tend to keep going up at a faster-than-average rate after such a good start to the year, according to a report that Belski gave to BourseWatch.
No one knows where “the September effect” came from.
Many things, according to people who work on Wall Street, cause stocks to drop in September. GLOBALT’s Martin said that trading volume tends to rise again after a summer dip, which could help cause more instability.
Mayfield said that many funds also change their portfolios in September, taking off wins from earlier in the year and putting money into new positions with an eye on the end of the quarter.
Adam Turnquist, chief technical analyst at LPL Financial, also said that the time for corporate buybacks is running out as companies get ready to report their earnings for the third quarter.
At this point, it’s also possible that the weakness in September is just continuing to happen on its own.
“Investors know about the “September Effect,” but they’ve never fully understood it.” “It could be more of a behavioral bias or self-fulfilling prophecy,” Turnquist said. Some people think it’s because traders are coming back from summer break.
The S&P 500 dropped 11.09 points, or 0.2%, on Friday, ending the week at 5,702, just below the record high it hit on Thursday. The Dow Jones Industrial Average reached a new high of 42,063.36, up 38.17 points, or 0.1%. This was the third record end of the week. This caused the Nasdaq Composite to drop 65.66 points, or 0.4%, to end the day at 17,948.32. At the end of the week, all three measures were up.
