- The fear September brings negative stock market performance is common but misguided.
- Future returns are never certain, and attempting to time short-term market swings is always tricky and rarely successful.
- Unless investors can identify an event on the horizon that warrants getting out of stocks, the routine transition from one month to the next is no reason to abandon this rally now.
To most, September marks the end of summer. Children return to school, the days get shorter—heck, the holidays are practically right around the corner! But in select parts of the US (including here in coastal Northern California), September is actually the warmest month of the year. Yet instead of barbequing and beach-going, some investors have turned their attention to a September seasonal investing myth claiming stocks will underperform next month.
The fear September brings negative stock market performance is common but misguided. It's true, on average, September has been the worst-performing month for the S&P 500, but it's not negative every year—far from it. If there were something fundamentally rotten about September, besides its poor average, it should be negative more often than not. Yet, since 1926, September S&P 500 returns have been positive 50.6% of the time—slightly better than a coin-flip that September's positive. In fact, many Septembers have boasted exceptionally strong returns: +16.9% in 1939, +6.2% in 1950, +8.7% in 1954, +5.6% in 1996, and +6.4% in 1998. As recently as 2007, the S&P 500 returned +3.7% in September—the second-best month that year.
In recent years, several events with negative implications for stocks occurred in September, contributing to negative average returns and coloring investors' perception of the month. The September 11th tragedy was a significant factor in September's -8.1% return in 2001. September 2002 (-10.9%) marked the last full month of a steep bear market—always a difficult period for stocks. Last year, Lehman Brothers' September bankruptcy sparked a financial panic, leading to an 8.9% monthly drop. Before assuming we're in for a similarly rough ride next month, investors should ask themselves: Is there something unique to September that caused these events to occur? Assuredly no. After all, if September is indeed a curse for investors, why are Septembers as likely (if not slightly more likely) to be positive—sometimes hugely so?
Future returns are never certain, and attempting to time short-term market swings is always tricky and rarely successful. If investors decide to sit out September, they risk veering from their long-term strategies. If they were right and September is a down month, will they feel confident enough about stocks to buy back in at month's end? If they were wrong and stocks are up, will regret keep them from buying back in at higher prices?
In a new bull market, the longer stock investors wait on the sidelines, the greater the potential for foregone gains. As we've seen since the March 9th market low, individual months can mean big gains in the early stages of a new bull. In the last six months including August (through 8/26), stock market returns by month were +8.8%, +9.6%, +5.6%, +0.2%, +7.6%, and +4.3%. These strong monthly numbers are typical of a new bull market. Capturing these upswings is essential to achieving long-term stock market returns.
Unless investors can identify an event on the horizon that warrants getting out of stocks, the routine transition from one month to the next is no reason to abandon this rally now. Currently, most fears (bank insolvency, commercial real estate, looming inflation, etc.) are widely known by investors and don't have the surprise power to cause another meaningful downturn. Investors would do well to regard September as San Franciscans do—not as an end to something good, but the start of sunnier days.
There are no guarantees stock market returns will be positive in September, but there's no reason to think they won't either. The stock market has been on an impressive run since the March 9th lows, and that doesn't have to end just because the calendar flips to September 1st.