September Effect

The September effect refers to historically weak stock market returns for the month of September. There is a statistical case for the September effect depending on the period analyzed, but much of the theory is anecdotal. It is generally believed that investors return from summer vacation in September ready to lock in gains as well as tax losses before the end of the year. There is also a belief that individual investors liquidate stocks going into September to offset schooling costs for children. As with many other calendar effects, the September effect is considered a historical quirk in the data rather than an effect with any causal relationship.

The September effect is real in the sense that an analysis of the market data—most often the Dow Jones Industrial Average (DJIA)—shows that September is the only calendar month with a negative return over the last 100 years. However, the effect is not overwhelming and, more importantly, is not predictive in any useful sense. If an individual had bet against September over the last 100 years, that individual would have made an overall profit. If the investor had made that bet only in 2014, for instance, that investor would have lost money.

Like the October effect before it, the September effect is a market anomaly rather than an event with a causal relationship. In fact, October’s 100-year dataset is positive despite being the month of the 1907 panic, Black Tuesday, Thursday, and Monday in 1929, and Black Monday in 1987. The month of September has seen as much market turmoil as October. It was the month when the original Black Friday occurred in 1869, and two substantial single-day dips occurred in the DJIA in 2001 after 9/11 and in 2008 as the subprime crisis ramped up.

However, according to Market Realist, the effect has dissipated in recent years. Over the past 25 years, for the S&P 500, the average monthly return for September is approximately -0.4% while the median monthly return is positive. In addition, frequent large declines have not occurred in September as often as they did before 1990. One explanation is that as investors have reacted by “pre-positioning;” that is, selling stock in August.

The September effect is not limited to U.S. stocks but is associated with markets worldwide. Some analysts consider that the negative effect on markets is attributable to seasonal behavioural bias as investors change their portfolios at the end of summer to cash in. Another reason could be that most mutual funds cash in their holdings to harvest tax losses.

Many mutual funds end their fiscal year-end in September. Mutual fund managers, on average, typically sell losing positions before year-end, and this trend is another possible explanation for the market’s poor performance during September.

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