Fisher Investments Reviews: Should Investors Fear the ‘September Effect’?

In this article, we will examine the “September Effect,” review the causes behind September’s negative average returns and discuss the danger of basing investment decisions on seasonal investing myths.

Is September Really Bad for Stocks?

September naysayers point out that, historically, the month has been bad for stocks. Indeed, since reliable market data began in 1925, September is not only the worst average month but the only month to average negative returns at -0.78% (Exhibit 1). Pundits also point out that September has seen notable examples of market declines, including a 29.6% fall in 1931 amid the Dust Bowl and Great Depression—the worst month on record.

Exhibit 1: Average Stock Returns by Month

Global Financial Data, S&P 500 Total Return Index, 12/31/1925 – 12/31/2023

We’re not here to dispute historical facts. However, we think it’s important to consider the facts in the right context. By definition, average return data includes all observations and outliers—like the Dust Bowl example. Is it possible to see another nearly thirty percent drop in a single month, regardless of which month it is? Yes, it’s possible. Is it very likely? History suggests otherwise.

The Truth Behind September Returns

Exhibit 2 shows the distribution of stock returns for September. Despite the negative reputation, September’s returns have been slightly more frequently positive (51%) than negative (49%)^[i]—essentially a coin flip. While less frequently positive than other months, this reinforces our belief that selling out of September is hardly guaranteed to be a good decision.

Exhibit 2: Distribution of Stock Returns for September Since 1925

Source: Global Financial Data, Inc., as of 8/26/2024. S&P 500 Total Return Index percentage change in September, 1926 - 2023. Shaded boxes indicate negative Septembers that occurred during pre-existing bear markets.

Additionally, as we alluded, many of September’s worst returns occurred during pre-existing bear markets (gold outlines above) with fundamental causes having nothing to do with September itself. We’ve already touched on the Great Depression years but consider the effect of the Tech Bubble in the early 2000s or the Great Financial Crisis from 2007-2009. These events were surely celestially-agnostic but contribute to September’s less-than-rosy reputation. Some people see a pattern, but in our view, September’s struggles seem spurious at best.

Stocks don’t care about calendar years, which month it is, or what you had for breakfast. They move on the disconnect between economic realities and investor expectations, keeping an eye on any risks and opportunities political developments may bring. Unless you have a strong, fundamental reason to be out of the market for any period—regardless of which month it is—the opportunity cost of short-term market timing is too high in our view.

Moreover, markets are efficient in part because investors constantly seek an edge. If there was a good reason stocks consistently performed poorly in September, investors would respond by selling beforehand, pushing the downturn to late August. Investors would take notice and the cycle would continue until no trace of a seasonal pattern remained.

Seasonal Market Strategies Are Flawed

Maybe this September turns out negative, or maybe it doesn't. You can't know today. But in our view, it doesn't really matter. The belief in calendar-based stock strategies like the “September Effect,” “Sell in May,” or the “Santa Claus Rally” assumes that past performance can predict future returns. This assumption is flawed—the stock market efficiently incorporates widely known information, and seasonal trends cannot predict future market movements reliably. If a calendar-based forecasting tool has predictive power, efficient markets have already considered it, sapping any potential advantage.

Want to Dig Deeper?

For more analysis on this seasonal investing myth, you can read Fisher Investments’ MarketMinder article, “September Isn’t a Danger to Your Portfolio—But Seasonality Myths Are.”