The Takeaway: September Market Outlook and Historical Trends

The US major indexes are currently on a winning streak, with four straight wins following Wednesday’s rally. However, despite this recent positive performance, the month of August is expected to end in the red for the averages after a strong start to the year through July. Historically, September is known as the worst-performing month of the year by most metrics.

As we approach September, there is reason for cautious optimism among investors. The final four months of the year may offer some hope for bulls, according to data from Yahoo Finance. September marks the return to school for kids and the return to markets for Wall Street, as institutional investors close their books on the illiquid summer months.

The old Wall Street adage “Hedge in May and go away” suggests that many large institutional investors try to ride out the middle of the year without making major portfolio allocation changes. However, unforeseen events such as changes in the market, the weather, or actions by the Federal Reserve can disrupt this strategy at any time.

Despite some challenges, this summer has seen favorable inflation data and higher stock prices, with the exception of the first three weeks of August. Looking at the performance of individual months in the S&P 500 over time can provide insight into what to expect in the coming months.

September stands out as a negative outlier, with a $1,000 investment in September alone since 1960 resulting in a 40% decrease to $600 by 2022. In contrast, October has shown a 79% increase to $1,785 over the same period. Both months have experienced significant market shocks in the past, such as Black Monday in 1987, the 9/11 attacks in 2001, and the collapse of Lehman Brothers during the Global Financial Crisis in 2008.

However, when excluding these major market crashes, September and October would have shown more positive returns overall. Looking at years similar to 2023, where stocks have seen significant gains by July but then falter in August, there is a lack of major market crashes, suggesting a potentially more positive outlook for the markets after Labor Day.

While seasonal studies like these only account for a portion of returns, the data indicates a more optimistic outlook than many are currently predicting for the markets in the coming months. Investors may find some comfort in the historical trends and potential for bullish seasonal tailwinds as we head into the year-end.

In conclusion, while September may historically be a challenging month for stocks, there are reasons to believe that the final months of the year could offer some positive opportunities for investors. By analyzing past trends and market behavior, investors can better prepare for potential market fluctuations and make informed decisions about their portfolios.

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