As summer winds down and we turn the calendar to September, you may start hearing an old Wall Street statistic resurface: September has historically been the weakest month of the year for the S&P 500.
There is some truth behind the reputation. According to S&P Dow Jones Indices, September has historically had the worst track record of any calendar month for the S&P 500, averaging a decline of approximately 1.16% since 1926.
But before we give one month on the calendar too much power, there is an important distinction to make:
Seasonality is an observation, not a prediction.
Why September?
There is no single, universally accepted explanation for the so-called “September Effect.” Instead, a combination of factors may help explain why the month has sometimes been more unsettled.
After the typically quieter summer months, market activity often picks up as investors and institutions return their attention to portfolios. September also brings the end of the third quarter, which can prompt portfolio rebalancing and repositioning. At the same time,
investors are digesting new economic data, Federal Reserve policy, corporate earnings expectations and the outlook for the remainder of the year.
In other words, September can become a natural point for investors to reassess expectations and sometimes that reassessment creates volatility.
History Doesn’t Determine What Happens Next
The historical average certainly does not mean September must decline.
In fact, September 2024 offered a great reminder of that. Despite entering the month with its historically poor reputation, the S&P 500 ultimately gained 2.02% and reached several new closing highs during the month.
Markets respond to far more than the calendar. Corporate earnings, economic growth, interest rates, valuations, investor expectations and unexpected events all play a much larger role in determining what happens next.
Charles Schwab has made a similar point: while September's weak historical record is worth recognizing, seasonality alone should not become the basis for an investment decision.
A Better Way to Think About September
If markets become a little more unsettled this fall, our encouragement is simple:
Don’t let a seasonal statistic become an investment strategy.
Short-term fluctuations are a normal part of long-term investing. A thoughtfully constructed financial plan already assumes there will be strong months, weak months and occasionally uncomfortable stretches along the way.
Rather than asking, “What will the market do this September?” we believe the more useful questions are:
· Is my portfolio still aligned with my goals?
· Is the level of risk I’m taking appropriate for my situation?
· Does my long-term financial plan still make sense?
Those are questions worth revisiting in every season.
So, if September headlines get a little noisy, remember:
History can provide perspective, but your financial plan should provide direction.