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Despite the spread of the Covid-19 delta variant, inflation at historic highs and deepening consumer pessimism, investors are feeling downright ebullient. The S&P 500 is up almost 21% year to date, after gaining more than 16% in 2020 and 29% the year before that.
A growing, investors need to be on their toes as the calendar turns to September, which has historically been the bleakest month for stocks. While long-term investors shouldn’t change course, you should be prepared for a little argy-bargy as fall arrives.
September Is the Worst Month for Stocks
Cast your mind’s eye back a year to September 2020. Stock indexes took a nosedive as Covid-19 cases started climbing again after a summertime lull, then-president Donald Trump was threatening businesses that worked with China and prospects were dimming for the second pandemic stimulus package.
The S&P 500 ended the month down about 3.9%, with the Dow Jones Industrial Average (DJIA) and the Nasdaq Composite seeing more modest declines.
That type of drama is more the rule than the exception for investors. Just two months have delivered an average negative return for stocks since 1945, according to market research firm CFRA: February and September, with the latter being the worst.
The S&P 500 has averaged a 0.56% decline in September each year since 1945 while April’s average 1.71% gain was the highest. In fact, the benchmark index dropped 55% of the time in September over this period, compared to just 24% of the time in December.
The picture is even darker when it’s the first September in a new presidential term, notes CFRA analyst Sam Stovall; The index has seen an average decline of 0.73% since 1945.
Nor does it seem to matter if the market has been on a hot streak. “Following the 14 years that new S&P 500 highs were set in both July and August, the S&P 500 declined an average of 0.74% and rose only 43% of the time,” Stovall wrote.
Stocks perform poorly when you look at other indexes, too. For instance, the worst month of performance for the Russell 2000 is—you guessed it—September. This collection of small-cap stocks declined by an average of 0.43% each September dating back to 1979. Thankfully the best month for the index was November, when it gained an average of 2.48%.
Why Stocks Might Decline This September
You don’t have to squint too hard to see why stocks may tumble this month. Covid-19 cases have increased over the past six months, especially in the Southeast, thanks to the more contagious delta variant.
Should this trend take hold elsewhere, there could be more business restrictions and vaccine mandates that could impact consumer demand. Shoppers could be less inclined to venture outside the home or travel in general. Air travel, for instance, has already seen more cancellations recently.
While inflation has risen since the spring, this could be the month that investors start becoming to rising consumer disillusionment. No matter which gauge of consumer sentiment you look at, folks simply aren’t feeling buoyant. Between the delta variant, steeply rising prices for consumer goods and even looming unemployment benefit cuts, people are buying less, and investor sentiment may take a hit as a result.
Then there’s the Federal Reserve. At its meeting later this month, the Federal Open Market Committee (FOMC) will likely discuss when and how to reduce the pace of its massive bond-buying spree. In his Jackson Hole speech, Fed Chair Jerome Powell defended the central bank’s stance on inflation and hinted that tapering of its bond buying could be announced sometime soon.
If the Fed were to announce a plan for tapering in September, markets could respond poorly—especially since they’ve become very used to the cheap funding supported by the Fed’s largess. Then again, if the Fed were to decide the economy isn’t strong enough to commence tapering, investors might freak out anyway.
How You Should Plan for September
There’s no reason to change your long-term strategy just because of a quirk of the calendar. While the stock market tends to decline in the month of September, around 45% of the time it has actually gained in the month, including in 2018 and 2019.
And regardless of what comes this September, remember that a good long-term investing strategy has these peaks and valleys in mind. In fact, dollar-cost averaging counts on the market’s natural volatility to get you a lower average cost per share of your investment over time. What’s more, the market’s average September decrease is less than 1%. That means even if we experience a typical September market dip, you probably shouldn’t brace for an all-out freefall, just perhaps a slow down.
That being said, it’s important to remind yourself about September’s proclivities, especially if you’re inclined to day-trading on Robinhood. Stocks don’t only go up; they also fall. This is the risk of being an investor, and you should face it with a stiff upper lip.