We have seen heightened market volatility during the first two weeks of September. In my previous blog posts, I discussed tech sell-offs and market perspectives, as well as an alternative investment amid growing stock market bubble concerns. To better navigate a highly volatile market, I also introduced a highly tax-efficient ETF (BOXX ETF). This product is suitable for conservative investors seeking high yields with minimal volatility as an alternative to high-yield savings accounts, CDs, and short-term Treasuries. Previously I posed an intriguing question: Should you buy the dip during the tech sell-off? I also discussed long-term investors' perspectives on market swings. Today, I will learn more about the September Effect and share my perspectives on how to navigate it.
What?
The "September Effect" is a historically observed phenomenon where stock markets tend to underperform in September. The Wall Street Journal published the chart below on Sept. 9, 2024, showing the average monthly return of the S&P 500 index since 1928. Clearly, September is the worst-performing month, with a decline of more than 1% over nearly a century of data.
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. Institutional investors may also sell toward the end of September as the third trading quarter comes to a close. Another theory suggests that since investors expect the September Effect to happen, market psychology takes hold and sentiment turns negative to align with those expectations.
Â
Although the September Effect is not consistent every year, it has been notably significant in recent times, with the S&P 500 recording losses in four consecutive Septembers​ in the last five years (see the table below).
As of early September 2024, the market has struggled, triggered by economic concerns such as the weaker-than-expected August jobs report. On September 6, 2024 (Friday), the Nasdaq was down 2.6%, and the S&P 500 was 1.7% lower—extending its weekly slide to around 4.2%.
 Â
So What?
For everyday investors, the September Effect can feel like a daunting challenge, particularly after experiencing losses during the first week of September 2024. But the following week (9/9 - 9/13/2024), the S&P 500 and Nasdaq, which rode five-session winning streaks, gained 4% and 6%, respectively, marking the best weekly performance of the year.
Â
It is important to view the September effect with a balanced perspective. Historical data suggests that while September may bring temporary downturns, these declines are often followed by rebounds later in the year. The sell-offs seen during September may be driven more by investor psychology and institutional behavior rather than fundamental weaknesses​.
Â
The volatility can provide a useful reminder of the importance of long-term investment strategies. Panicking during seasonal dips may lead to emotional decision-making, which often results in locking in losses. Instead, September’s market activity can offer opportunities, particularly for those looking to buy into quality stocks or diversify their portfolios while prices are lower​.
Â
Now What?
For investors looking to navigate the rest of September and beyond, several strategies may be beneficial:
Diversify: Ensure your portfolio is not overly exposed to high-volatility sectors. Consider adding defensive stocks such as consumer staples, healthcare, or dividend-paying companies, which tend to weather downturns better​.
Stay the Course: Avoid knee-jerk reactions to market dips. Refer to our previous post to learn more about how you can overcome irrational behaviors in volatile markets. If your investment strategy is sound and aligned with long-term goals, it may be better to stay invested and ride out the volatility rather than selling during a downturn​.
Use Dollar-Cost Averaging: This method allows you to continue investing at regular intervals, reducing the impact of short-term fluctuations​.
Keep an Eye on the Fed and Economic Indicators: Pay close attention to key economic data and Federal Reserve decisions, as these could influence market sentiment and present buying opportunities​.
Â
Concluding Remarks
In summary, while the September Effect has been historically significant, it doesn’t necessarily spell doom for investors. It is also a good time for strategic investors to evaluate their portfolios and seize opportunities. Rather than focusing on the market's temporary downswing, savvy investors can use this period to strengthen their long-term financial positions.
Â
Comments