September is generally a bad month for the stock market.
In fact, historically it is the worst month of the year due to what is known as the September effect. From 1928 to 2023 the S&P500 has seen an average decline in September – even though the broad market index has delivered an average annual return of 9%, meaning the return excluding September is even stronger.
There is no apparent reason for the usual sell-off. It could be due to traders adjusting their positions after the summer holidays, taking profit in the run-up to a new school year, or some other seasonal factor that goes under the radar.
However, not every September is a downer for investors. This year appears to be breaking the historical pattern, as the S&P 500 just set another record high.
Through September 25, the S&P 500 is up 1.4% year to date from September. In fact, all three major indexes are up this month, as shown in the chart below.
Stocks have been helped by the Fed’s 50 basis point rate cut, amid a broader debate over the power of artificial intelligence (AI) stocks. In particular the Nasdaq still hasn’t returned to July’s record high, but it’s getting close.
The S&P 500 hasn’t posted a September gain since 2019, even though the index was in the midst of a rally in three of those four years (2020, 2021 and 2023 all posted strong returns). In some years that performance has been particularly poor. For example, last year the broad market index fell 5% in September, the worst month of the year. The Fed has scaled back its earlier forecast for rate cuts as inflation remained stubborn.
In 2022, the economy fell 9%, and in both 2020 and 2021, the economy fell 4%.
Given that pattern, September’s gains appear significant.
What history says about September profits
Since 2009, the S&P 500 has risen seven times in September. On five of those occasions, the S&P 500 continued to rise in the fourth quarter, as the table below shows.
|
Year |
September performance of the S&P 500 |
S&P 500 Q4 performance |
|---|---|---|
|
2009 |
0.9% |
5.4% |
|
2010 |
8.8% |
10.2% |
|
2012 |
2.4% |
-1% |
|
2013 |
3% |
9.9% |
|
2017 |
1.9% |
6.1% |
|
2018 |
0.4% |
-14% |
|
2019 |
1.7% |
8.5% |
|
2024 |
??? |
??? |
|
Average |
2.7% |
3.3% |
Source: YCharts, data collected by author.
As you can see, there was only one year where the S&P 500 seriously underperformed after a September gain. That was in 2018. That year, Fed rate hikes led to rising bond yields, depressing stock valuations, and fears of a trade war with China also spread.
However, the general trend seems to be that September gains tend to lead to solid fourth-quarter gains. In five of the aforementioned seven years, the S&P 500 gained more than 5%, or an annualized gain of more than 20%.
Will the S&P 500 rise in the fourth quarter?
There are a number of factors that will impact the S&P 500’s fourth-quarter performance, including corporate earnings, Fed rate cuts, the presidential election, holiday spending and other developments and unknowns.
It’s impossible to know with certainty how the S&P 500 will perform in the fourth quarter, but momentum in the index is promising, especially during a normally weak month for stocks.
Ultimately, investors are better off focusing on the long term. Remember, the S&P 500 has grown at a compound rate of 9% annually, with dividends reinvested over its history.
While there’s no guarantee the index will rise in the fourth quarter, the dynamism of the U.S. economy should keep the S&P 500 a winning ticket for investors in the long run.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The stock market is poised to do this for the first time in five years. History Says This Is What Happens Next was originally published by The Motley Fool
