Is the stock market safe from ‘September Effect’ this year?

As the summer draws to a close and September approaches, investors are increasingly cautious with their investments due to a phenomenon known as the September Effect. 

Historically, dating back almost a century, September has been the worst-performing month for the stock market with lower-than-average returns and heightened volatility.

Though the September Effect is an anomaly in the stock market and not guaranteed, it has been observed over multiple decades. This leads many to question if the market is safe from the September Effect this year.

Causes of the September Effect

The September Effect trend has been observed in the U.S. markets and even global markets where returns are lower compared to other months. Some theories about the causes of the September Effect include seasonal behavioral patterns, portfolio shifting, and tax-loss harvesting. 

One of the leading theories for the phenomenon is the seasonal mindset of investors after they return from summer vacations with a shift in focus on their portfolios, often leading to a reassessment of assets and the selling of certain positions. This pressurized selling brings volatility to the market and can lead to a downturn. 

Another theory that attempts to justify the September Effect is the portfolio rebalancing by mutual funds and institutional investors who tend to eliminate their losing positions in September.

Additionally, as the end of the fiscal year approaches, some investors may engage in tax-loss harvesting and selling off underperforming holdings to offset capital gains, contributing to the already established selling pressure. 

The current market environment 

To fully understand the September Effect, it is important to observe some key indicators to determine the current state of the market.

In the first half of 2024, GDP growth has remained constant with a positive performance, but the projections for the remainder of the year suggest a slowdown to a modest 0.6 percent annualized in Q3 2024. Despite earlier momentum driven by strong domestic demand, high prices, and elevated interest rates are now curbing consumer and business spending. 

Additionally, the upcoming election adds another layer of uncertainty as a change in administration could bring about new economic policies. 

Furthermore, unemployment rates have increased to 4.3 percent in July, and an additional 352,000 people have reported unemployment. As September approaches, this could be a key indicator of how the market responds to the season.

Other fundamental indicators to closely follow are inflation and interest rate projections for the rest of the year. Inflation could decrease to 2.7% in the month of summer, and mortgage rates look to average 6.8% in Q3 2024. 

Strategies for September

As September is within sight, investors may wish to adopt strategies to minimize unnecessary market volatility. Diversifying portfolios across various assets and sectors can help spread risk, as different investments may react differently to market conditions.

Some industries to focus on for investors who are looking for stability include utilities, healthcare, and consumer staples stocks, as these industries tend to be less impacted by economic downturns. 

Another important action to take is to remain informed about economic data, Federal Reserve policies, and geopolitical events, which is crucial for making timely investments.

Finally, maintaining some liquidity in the portfolio can offer flexibility to shift positions and protect against sharp losses quickly. By employing these strategies, investors can better navigate the uncertainties that September may bring and potentially find opportunities even in a volatile market.

Overall, while the September Effect is a well-documented phenomenon, it is by no means a certainty. As a result of this, Investors should remain vigilant, stay informed, and consider strategies that align with their own risk tolerance and financial objectives.