When September rolls around, the stock market community braces itself for what has earned a notorious reputation over the last century—the "September Effect." But what’s behind this fear, and is there truth to it, or are we just letting history scare us into making bad decisions? Let’s dive into the history, analyze what’s happening in September 2024, and why investors like us should think twice before hitting the panic button.

If you've spent any time in the markets, you’ve probably heard the age-old saying that “September is the worst month for stocks.” But where did this even come from? Well, let me start with a cold, hard fact: Since 1928, September has averaged a decline of about -0.78% on the S&P 500. That’s right—no other month has delivered as consistently poor results over such a long period.

And here’s the crazy part: September is the only month that has averaged a negative return for the past 100 years. Even with all the ups and downs we’ve seen, other months like October (famous for its crashes) have managed to net positive over the long haul, but not September.

However, as with all things in investing, the devil is in the details. Despite its ugly reputation, 51% of the time, the S&P 500 has still posted gains during September. So, while the averages suggest that September has been the worst, it’s not exactly a bloodbath every single year. In fact, when you strip out the outliers (think 1931, 2001, 2008), September’s performance looks a lot more normal.

Let me be honest—September wouldn’t have this reputation if not for a few disastrous years that shook the market to its core. In September 1931, during the peak of the Great Depression, the S&P 500 dropped a staggering 29.6%. That’s not just a bad month; that’s an absolute wipeout. Similarly, in 2001, the tragic events of 9/11 triggered a huge market selloff in September. And then we have September 2008, when the collapse of Lehman Brothers sent markets crashing, with the S&P 500 dropping almost 9% in one month.

If we exclude those disastrous years, the historical average return for September actually improves significantly. But guess what? The stories of those few Septembers have been so catastrophic that they’ve defined the entire month for decades. It's like September can’t shake the stigma of being the "market killer," even though a lot of it comes down to a few bad apples spoiling the bunch.

Let’s zoom in on the here and now. As of early September 2024, we’re already seeing the classic September jitters. The S&P 500 is down about 4%, and the Nasdaq has slumped by nearly 6%. Why? It’s the usual suspects: inflation fears, rising interest rates, and anxiety about a potential economic slowdown. These are concerns that have been lingering for a while now, but September seems to amplify the market’s fear factor.

Interestingly, 2024 is an election year in the U.S., and historically, that has actually worked in favor of the stock market. September tends to perform better in election years than in non-election years. Since 1950, stocks have advanced in 52% of Septembers that preceded a presidential election. So while the first week of September has been rough, there’s still hope that we could see a turnaround as we approach the end of the month.

Now, you might be wondering why September consistently gives us such grief. There are a few popular theories. First, traders and investors tend to come back from summer vacations and start rebalancing their portfolios in September. This often means selling off stocks to lock in gains or to prepare for year-end tax planning, which drives down stock prices.

Another theory is that mutual funds and other large institutional investors close out their books at the end of the third quarter, which leads to increased selling. And then there’s a behavioral aspect—since everyone “expects” September to be a bad month, market psychology kicks in, and sentiment turns negative, creating a self-fulfilling prophecy.

But here’s what we don’t talk about enough: algorithmic trading and the digitalization of markets have reduced some of the seasonal effects we used to see. In other words, the September Effect is no longer as powerful as it once was, but the myth persists.

Here’s my take: Don’t let the calendar control your portfolio. Yes, September has had some rough years, but selling stocks simply because the month of September has arrived is a flawed strategy. If anything, September can be a great buying opportunity if you know what to look for.

Remember that markets are forward-looking. The same fears that are driving stocks down in early September could very well set the stage for a year-end rally. In fact, historically speaking, the fourth quarter tends to be the best-performing quarter of the year. Sitting out September could mean missing out on gains in the months ahead.

While the data supports the notion that September has historically underperformed, it’s important to recognize that the world of investing has changed. The advent of algorithmic trading and the global nature of markets mean that these seasonal patterns don’t hold as much weight as they once did. Still, the perception of September as a tough month persists, largely because of the extreme outliers we’ve discussed.

In 2024, with volatility already at the forefront, we can expect this September to continue challenging investors. However, it's essential to stay the course and focus on long-term fundamentals rather than letting market timing dictate your decisions.

September might be a rocky month, but it’s not the disaster it’s often made out to be. While past performance shows it can be tough, there are plenty of Septembers where stocks have performed well. In 2024, the market’s early September performance has already been bumpy, but that doesn’t mean you should sit on the sidelines.

Stay informed, focus on the fundamentals, and look at September as an opportunity. Don’t let fear drive your decisions—this could be the perfect time to grab stocks at a discount.

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