The September Effect refers to the stock market being weak in the month of September. Is this true? Well, that depends on which period you analyse, and a lot of the supporting “evidence” is anecdotal.
If we look at the Dow Jones Industrial Average (DIJA) for the last 100 years, the month of September will be a calendar month with a negative return. Still, the effect is not huge, and it is difficult to predict if it will occur in any given year or not.
Also, the September Effect seems to have been dissipating in the 21st century. Over the most recent 25 years, the average monthly return for the S&P 500 has been circa – 0.4% for September. At the same time, the median monthly return has been positive.
If we look at the date, we can see that large declines in September were more common pre-1990 and post-1990.
The September Effect is typically mentioned in the context of United States stock markets, but similar tendencies have been reported from stock markets in other parts of the world as well. Once again, if this is actually true or not depends on lot on which period you elect to look at.
Possible contributors to the September Effect:
- Seasonal behaviours, as investors who return from summer vacations are, allegedly, prone to change their portfolios at the end of summer to realize profits (lock in gains) and realize losses (for tax reasons before the end of the year).
- Mutual funds are prone to cash in their holdings after the summer to harvest tax losses.
- Some analysts have argued that small-scale individual investors sell of stocks in September to pay for school fees and other start-of-the-school-year costs for their children, and that even though each sale is small, the combined impact is noticeable.
- The self-fulfilling prophecy. If there is a small dip in market prices, it triggers automatic stop-loss orders. Investors noticing this contribute to the dip by making manual sell-offs as well, fearing a bear market. Also, the sheer notion of there being a September Effect can promote weakness in the market in September.
Is there be an August Effect?
Some analysts have speculated that we today have less of a September Effect because quite a lot of investors have adapted to expect a September Effect and therefore realize profits in August instead.