That’s why September is so brutal for the stock market

As August closes out the summer season, the S&P 500 may soon be taking a break of its own. On average, September has been the worst month for the benchmark index since 1928. Not only do stocks regularly underperform, it’s not uncommon for the market to end the month with a negative return.

The S&P 500 has lost ground in 55 percent of Septembers over the past century, according to CME Group data from last year. More recently, the index has declined over the past four years, Deutsche Bank added.

A big culprit is the higher trading volumes when Wall Street goes back to work after Labor Day. With more traders on vacation during the summer, activity in the stock market lags, leading to stronger market performance on thinner trading volumes. SoFi’s Liz Young Thomas found that monthly trading volume for the S&P 500 averages 15.2 billion shares between June and August. However, when investors return to their desks in September, volume jumps to 17.2 billion shares.

“People are coming back and starting to trade again.” “There’s just more activity in the market, which can lead to volatility,” the head of investment strategy told Business Insider, adding: “Quite naturally, people might look at portfolios and say, ‘I’m a little overweight on Mag Seven,’ or I’m a little overweight on large-cap stocks, or I’m just overweight on stocks in general.”

“September sees some of the most volatile swings of the year, and 2 percent moves in either direction are the norm for the S&P 500,” Young said. Although volatility continues into the fall, September stands out in that downside moves far outweigh upside momentum, she said.

What we could expect this year

Some market-moving events could make this September unique. For example, all eyes are on the Federal Reserve’s monetary policy meeting on September 18. Rate cuts are widely expected – a move generally seen as positive for the bull rally. However, as Adam Turnquist of LPL Financial noted, that could change due to the upcoming August jobs report, which will be released on September 6.

If the jobs report is weaker than expected, the Fed could resort to a larger rate cut, which would be an acknowledgment of a weakening economy. “If we get a little better economic data next week, the soft landing narrative gains a little more traction and we could break the losing streak we’ve seen in September over the last few years,” chief technician Adam Turnquist told BI, but outlined that downside risk looks more likely.

Since September, election fears can only prolong seasonal volatility. SoFi’s Young Thomas found that heightened volatility in election years peaks in mid-October, not late September. But that is often followed by a relief rally once the results are in, she said.

How to prepare for it

Portfolios should not be adjusted based on seasonal fluctuations, both experts told BI — that’s difficult to predict and not a fundamental long-term input. For those thinking about the coming months, Young Thomas suggests the investor should pay attention to how the trading environment might change shortly. “You have to sit back and think, ‘Well, OK, what tends to do well with a steepening yield curve, falling yields and a falling dollar?'” she said, referring to three outcomes implied by a rate cut.

In this context, high-dividend stocks could be worthwhile, she said. As yields fall, Treasury bills lose their luster, sending investors in search of other sources of income. Dividend stocks can benefit, she said, adding that they tend to be concentrated in utilities and basic necessities. A weaker dollar, meanwhile, could boost the healthcare sector, as a falling greenback should drive the rise in medical exports, she said. Increased trade activity would also benefit the aerospace and defense sectors. Turnquist also noted that it might be wise for investors to buy the seasonal bottom.

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“Buying the September or October low was a very good trade,” he said. “In October, things start to improve, and then you have that November, December, year-end rally, with very high average returns and high positivity rates for those months.”