No, September Isn’t a ‘Bad Month’ for Stocks

Last week, the calendar turned to September, and with the flip came the usual warnings that September is the stock market’s worst month. This time around, the September caution started appearing in early August, with pundits warning seasonal volatility is sure to strike. Thus we bring you our annual reminder: Seasonal patterns aren’t predictive, and the calendar isn’t a market driver.

As usual, the data supposedly supporting the sour September theses vary. Some cite the S&P 500’s average September return over the long term, -0.61%.^[i] Others allege corrections (sharp, sentiment-fueled pullbacks of -10% to -20%) tend to happen in September. One rather creative study averaged returns since 1950 when a new party is in the White House and—whaddaya know—found a modest September pullback. Research citing lunar phases and star alignments that average returns when Jupiter is in Aquarius probably isn’t far behind.^[ii]

To us, the notion of a bad September—or any “good” or “bad” calendar stretch—has long seemed very silly. Markets are efficient—they digest all widely known information near-instantaneously. The Gregorian calendar has been in use since the 16^th century. Most everyone in the world has one on their wall, desk, computer and/or smartphone. We kind of think that meets the definition of “widely known”? To the extent September ever had any predictable negativity, markets would have priced it in decades ago, erasing its psychic powers. Traders would have quickly front-run it out of existence.

September’s average return, which is the S&P 500’s worst and only negative calendar month, isn’t what it might appear to be, either. That is, it isn’t a sign September is usually bad. Averages are made up of extremes. In this case, a few extreme Septembers in the 1930s wrecked the average. Exclude these, and the average flips positive, 0.1%.^[iii] That also happens to be the median September return even with those 1930s Septembers. This means an equal number of Septembers exceeded 0.1% as trailed it. A coin flip. September’s frequency of positive returns is 50 out of 94, or 53%. To be fair, that is behind the overall frequency of positive monthly returns (about 63%).^[iv] But returns are still positive more often than not and land most frequently in the 0% to 5% range. Overall, to us, there just doesn’t appear to be anything inherently wrong with the month. Avoiding a month that is positive more often than not seems … weird.

As for the other niche ways we have seen September sliced, the underlying data are similar. By our count, there have been 26 S&P 500 corrections since WWII. Of these, 14 excluded September, while 12 included it in full or in part—random. Five of them started in a September, which might come in handy at trivia night, while two ended then. But that isn’t a compelling indictment of September: If less than one-fifth of corrections started in September, that isn’t exactly a useful probability.

Lastly, regarding that whole Since 1950, September stinks the first year a new party resides at 1600 Pennsylvania Avenue thing, it is a sample size of nine. Five negative Septembers and—wait for it—four positive. Three of those negative Septembers happened during pre-existing bear markets as well as new Republican presidents, whose inaugural-year returns tend to be weaker overall as investors’ hopes for pro-business policy prove false. We don’t have that now—we have a first-year Democrat, whose inaugural years are usually above-average as investors’ fears of anti-market policy also prove false. That isn’t a forecast for September 2021, mind you, but it speaks to the broader point that context matters.

Maybe this September adds another negative. Maybe it doesn’t. You can’t know today. But also, it doesn’t really matter, in our view. Thinking in terms of bad months versus good months is just myopic. A month is highly unlikely to prove material in the broad context of an equity investor’s time horizon. It also isn’t helpful when you consider markets are cyclical and subject to short-term volatility. Bear markets don’t arrive willy-nilly—they arrive when euphoric investors ignore creeping fundamental deterioration or when some huge, unseen, negative wallops stocks before sentiment finishes climbing the proverbial wall of worry. If you want to try to avoid some of a bear market’s decline, these are the conditions to look for. Corrections and pullbacks, by contrast, start and stop for any or no reason. But neither bear markets nor corrections run on schedules. We think they are impossible to time precisely and repeatedly, which makes enduring them part of the toll people pay to ride stocks’ marvelous long-term returns.

Trying to avoid volatility by sitting out September may save you a small negative return if you are lucky.^[v] But it might also cost you missed returns, plus transaction costs and tax headaches. Given September is positive more often than not, in our view, the risk/reward tradeoff here just doesn’t make sense. So, we recommend sitting tight and tuning down the September chatter.