It was a rough month for the U.S. stock market, but it ended on a good note after a day of heavy selling on August 5 that made Wall Street’s worst day in almost two years.
As we know from the past, however, seasonal weakness in September could stop the progress by making the financial markets more volatile.
Based on past results, September seems to be the worst month of the year for the stock market. Dow Jones Market Data shows that since 1928, the S&P 500 SPX -2.12% has had an average monthly drop of 1.2% and has only finished higher 44.3% of the time.
The Nasdaq Composite COMP -3.26% and the Dow Jones Industrial Average DJIA -1.51% have both had slow months in the past, with average monthly drops of 1.1% and 0.9%, respectively. This means that stocks may not do very well in September. According to Dow Jones Market Data, the Nasdaq has ended the month ahead 54.1% of the time since 1971, while the Dow has only done so 41.7% of the time since 1897.
“In September, people return to their desks to trade stocks again after their summer break.” Liz Young Thomas, head of financial strategy at SoFi, said in an email on Thursday, “September is the second-busiest month for trading volume of the whole year.”
Trading activity on the New York Stock Exchange is usually low in the summer. According to data from FactSet, the fewest shares trade on average in July and August.
Young Thomas told MarketWatch in a follow-up interview on Friday that more trading can make the stock market more volatile. The S&P 500 had big gains in the summer of 2024 and quickly bounced back from the drop on August 5. This may make investors want to “reposition” their portfolios after “a period of returns that’s maybe a little bit outsized,” she said.
“People who were away or didn’t trade as much as usual over the summer find that they have a lot of gains in their equity portion when they come back in September,” Young Thomas said. “People might make some gains in September just to get their positions right.”
On the other hand, the Federal Reserve could start lowering interest rates in September if inflation and job market numbers between now and their meeting on September 17th and 18th still allow them to do so.
“We are facing the first rate cut in a very long time…” However, Young Thomas said, “markets are just not quite used to that yet.” “We’ve been hearing about rate cuts and looking forward to them in a good way, but there’s no guarantee that they will be good for the whole cutting cycle.”
The CME FedWatch Tool said that the Fed was likely to stick to its plan to cut rates three times this year by 25 basis points each after seeing last Friday’s PCE inflation figures. There is still a chance of a more aggressive 50-basis-point cut, though, if this week’s August employment numbers show that the job market is slowing even more.
The upcoming U.S. presidential race could make the stock market even more volatile. Based on how the S&P 500 has done in the past during election years, Sam Stovall, chief investment analyst at CFRA Research, told MarketWatch last month that stocks could have a slow and volatile time between now and Nov. 5.
The Cboe Volatility Index VIX 38.13%, Wall Street’s closely watched “fear gauge,” has been in free fall since early August, when it peaked above 65. However, fund managers at Little Harbor Advisors said there is no “imminent worry” in the stock market in September.
Statista says that the VIX has dropped 77% since August 5 and was still well below its long-term average of around 20 on Friday afternoon.
Matthew Thompson, portfolio manager at Little Harbor Advisors, said, “You need to be very careful with hedging because it costs a lot to do it when nothing is happening.”
Thompson told MarketWatch on Friday, “We’d rather wait until we see signs in the VIX that it is surging. That’s when we’ll start to hedge.” As of right now, we’re just waiting and watching. There are a lot of things on the calendar that could move the VIX in September.
On Friday, U.S. stocks ended August with wins for the month. FactSet data shows that the S&P 500 went up 2.3% last month, the Dow went up 1.8%, and the Nasdaq went up 0.7%.
