September Effect: Definition, Stock Market History, Theories

september calendar illustration
Illustration by Josie Portillo

What Is the September Effect?

The September effect refers to the historically weak stock market returns observed during the month of September. In fact, September has been the worst performing month, on average, going back nearly a century.

The September Effect is a case of a calendar-based market anomaly, in the sense that it occurs without any real causal link or event, challenging the efficient markets hypothesis (EMH). There is a statistical case for the September effect depending on the period analyzed, but much of the theory is anecdotal. In recent years, the median return for September has actually been positive.

Key Takeaways

  • The September Effect is a supposed market anomaly whereby stock market returns are relatively weak during the month of September.
  • This is considered an anomaly since it violates the assumption of market efficiency.
  • Some consider the observed weakness in September to be attributable to seasonal behavioral bias as investors make portfolio changes to cash in at summer's end.
  • While there may be some statistical evidence for the September Effect, this will depend on what time period you look at.
  • Most economists and market professionals discount the existence of the September Effect.

Understanding the September Effect

From 1928 through 2021, the S&P 500 index has averaged a decline during the month of September. This is, however, an average observed over many nearly a century, and September is certainly not the worst month of stock-market trading every year. In fact, for some years September has been among the best-performing months. Moreover, while the average return for September is negative, the median return for that month has turned positive.

While the September Effect might present a market anomaly in the sense that it violates the assumption of market efficiency, the effect is not overwhelming and, more importantly, is not predictive in any useful sense. This is because the time period under consideration will matter a great deal.

For instance, if an individual had bet against September over the last 100 years, that individual would have made an overall profit. If the investor had made that bet only since 2014, though, that investor would have lost money.  

Why The September Effect Could Exist

It is generally believed that investors return from summer vacation in September ready to lock in gains as well as tax losses before the end of the year. There is also a belief that individual investors liquidate stocks going into September to offset schooling costs for children. Another theory suggests that since investors expect the September Effect to happen, market psychology takes hold and sentiment turns negative to align with those expectations.

Institutional investors may also sell toward the end of September as the third trading quarter comes to a close. They can lock in some profits going into the end of the year. Another reason could be that many large mutual funds cash in their holdings to harvest tax losses at the end of the quarter.

Yet the September Effect is largely discounted by economists as irrelevant, and that if it did once exist, traders with knowledge of the anomaly now act in such a way as to make it disappear in practice. In addition, frequent large declines have not occurred in September as often as they did before 1990. One explanation is that investors have reacted by “pre-positioning;” that is, selling stock more in August.

As with many other calendar effects, the September effect is considered a historical quirk in the data rather than an effect with any causal relationship. 

The October Effect vs. September Effect 

Like the October effect before it, the September effect is a market anomaly rather than an event with a causal relationship. It suggests that the month of October, too, is a negative month for the stock market. However, October’s 100-year history is, in fact, net positive despite being the month of the 1907 panic, Black Tuesday, Thursday, and Monday in 1929, and Black Monday in 1987.

But September has seen an equal amount of disruption It was the month when the original Black Friday occurred in 1869, and two substantial single-day dips occurred in the DJIA in 2001 after 9/11 and in 2008 as the subprime crisis ramped up. Like the September Effect, the presence of the October Effect will depend on the time period under consideration. Economists and analysts also discount the true presence of the October Effect, and if it did once exist, seems to have also disappeared.

What Has Been the Worst Month for Stocks?

This will depend on the time period you look at, but over the past century, September has been the worst-performing month for stocks, losing around 1% on average.

Are Stocks Always Down in September?

No. Stocks have been down in September 55% of the time since 1928, making it just slightly more than a 50/50 chance of showing a negative return for the month.

Is the September Effect Real?

Historically, September has been the worst-performing month for stocks spanning the last century, on average. It is also the most-frequently down month over the same period. Nevertheless, the effect has been attributed by most economists to chance (one month has to be the worst, after all). Depending on the time period under consideration, the September Effect may be present, or not. Research taking an even longer time horizon back over 300 years (using U.K. data since 1693) shows no evidence at all of the Effect. September mean returns are actually higher than the returns during the other months for 3 out of the 6 50-year subperiods, although the difference is not statistically significant.

The Bottom Line

The September Effect is the supposed market anomaly whereby stocks turn negative in the month of September. While it is true that September has been the worst-performing and most-frequently negative month over the past century, the time period under consideration matters a lot. In fact, if we look even further back to the 1800s in the U.S. or the 1700s in the U.K., there is no September Effect at all. As with all anomalies thought to occur in the stock market, the reality is that they likely do not exist, since markets do tend to be efficient (especially once anomalies are identified and publicly-known). As such, one should probably not use the notion of the September Effect to make trading decisions.

Article Sources
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  1. Stock Trader's Almanac. "September Almanac: Worst Month of the Year since 1950."

  2. Yardeni Research. "Stock Market Indicators: Historical Monthly & Annual Returns."

  3. Fang, Lily, Chunmei Lin, and Yuping Shao. "School holidays and stock market seasonality." Financial Management Vol. 47, No. 1, .2018. Pp. 131-157.

  4. Zhang, Cherry Y., and Ben Jacobsen. "Are monthly seasonals real? A three century perspective." Review of Finance, Vol. 17, No. 5. 2013. Pp. 1743-1785.

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