Why Do People Say September Is the Worst Month for Investing?

Often in the financial media, you will hear people make reference to specific times of the week, month, or year that typically provide bullish or bearish conditions.

One of the historical realities of the stock market is that it typically has performed poorest during the month of September. The "Stock Trader's Almanac" reports that, on average, September is the month when the stock market's three leading indexes usually perform the poorest. Some have dubbed this annual drop-off as the "September Effect."

Key Takeaways

  • Since 1950, the Dow Jones Industrial Average (DJIA) has averaged a decline of 0.8%, while the S&P 500 has averaged a 0.5% decline during the month of September.
  • The September Effect is a market anomaly, unrelated to any particular market event or news.
  • The September Effect is a worldwide phenomenon; it doesn't only affect U.S. markets.
  • Some analysts consider the negative market effect may be attributable to seasonal behavioral bias as investors make portfolio changes to cash in at summer's end.

Understanding the September Effect

Since 1950, the month of September has seen an average decline in the Dow Jones Industrial Average (DJIA) of 0.8%, while the S&P 500 has averaged a 0.5% decline during September.

Since the Nasdaq was first established in 1971, its composite index has fallen an average of 0.5% during September trading. This is an average exhibited over many years, and September is certainly not the worst month of stock-market trading every year.

The September Effect is a market anomaly and not related to any particular market event or news. In recent years, the effect has dissipated. Over the past 25 years, for the S&P 500, the average monthly return for September is approximately -0.4%, while the median monthly return is positive.

In addition, frequent large declines have not occurred in September as often as they did before 1990. One explanation is that as investors have reacted by “pre-positioning”—that is, selling stock in August.

Explanations for the September Effect

The September effect is not limited to U.S. stocks but is associated with most worldwide markets. Some analysts consider that the negative effect on markets is attributable to seasonal behavioral bias as investors change their portfolios at the end of summer to cash in.

Another reason could be that most mutual funds cash in their holdings to harvest tax losses. Another particular theory points to the fact the summer months usually have lightly traded volumes, as a good number of investors usually take vacation time and refrain from actively trading their portfolios during this downtime.

Once the fall season begins and these vacationing investors return to work, they exit positions they had been planning on selling. When this occurs, the market experiences increased selling pressure and, thus, an overall decline.

Additionally, many mutual funds experience their fiscal year end in September. Mutual fund managers, on average, typically sell losing positions before year end, and this trend is another possible explanation for the market's poor performance during September.