Don’t Be Afraid of the September Sell-off
Robert Ross|September 10, 2024
I usually try to view markets through an optimistic lens.
There’s good reason for that. The S&P 500 has finished in positive territory 75% of years over the past century.
When market crashes do happen, they are extremely rare. In fact, 50% declines have happened only three times in the last 100 years (1921, 2000, 2008).
Yet when the leaves start turning and the weather begins to cool in early September, I’m not afraid to put on my pessimist cap for a few months.
Because the data on market seasonality is clear.
‘Tis the Season (for Volatility)
As my colleague Shah Gilani has written about recently… seasonality refers to the tendency of financial markets to perform differently during various times of the year.
For instance, July is historically the best month for the S&P 500 as the index has on average gained 2.3% on average over the last 20 years. This trend is attributed to a few factors, including second-quarter earnings usually falling in July, lower trading volumes, and mid-year portfolio rebalancing.
This year fit the trend. In fact, the S&P 500 finished July up 0.62%. The gain comes on the heels of two very solid months for the S&P 500, with the index rising 4.9% and 3.1%, respectively, in May and June.
However, while the summer months are usually kind to stocks, the fall months can be mean.
Welcome to “Fall”
It’s said we call the third season of the year “fall” because of falling leaves.
But as someone who thinks about the stock market all day, I call it fall because stocks tend to “fall” during September and October.
While the summer months usually bring gains for the market, the fall months are not as kind. In fact, September is historically the worst month of the year for stocks. It’s the only month of the year that has a negative return, with the S&P 500 falling an average of 0.7% since 2004.
And if you zoom out even further back to 1964, the same pattern persists…
This is one of the stranger anomalies I’ve come across.
I’ve never heard a good reason for why this happens. Some analysts argue September’s poor performance stems from fund managers selling underperforming stocks as they prepare for the end of the fiscal year. Others suggest that investors may begin to reassess their portfolios after the summer rally, locking in gains before the year-end.
Whatever the reason, the data is clear: September has a long history of disappointing investors, making it a month to approach with caution.
But even if this becomes another September to remember, you need keep your eyes on the long-term prize.
Tune Out the Short-Term Noise
Markets may struggle over the next month. History shows that to be highly probable.
But that doesn’t mean you need to panic. Volatility is the price we pay for higher returns in the stock market. It never feels good to see your portfolio falling in value. But that is what we’ve all signed up for by investing in stocks.
Plus, the fundamental picture for the stock market is bullish. The bull market continues to be underpinned by rising earnings expectations. As we’ve discussed many times, the main driver of stock prices is future earnings expectations. And since the October 2022 lows, S&P 500 earnings have continued to rise…
The typical bull market spans 30 months and produces a 90% price gain. So far, we are at 22 months and 61%. So, statistically speaking, it’s not a good idea to bet against the bull market.
And considering we are entering a period of global monetary stimulus as central banks around the world begin lowering interest rates…
Now is the time to remain optimistic even if stocks “fall” like they did last week.
And above all else, do not panic-sell your positions. If you invested $10,000 in 2004, it would be worth $60,000 today… if you did absolutely nothing. But if you missed the best 10 days trying to time “pullbacks,” that $10,000 would only be worth $30,000…
But unless you plan to retire and sell your securities in the next month, it’s best to stand pat and ride out the volatility.
And if you’re nervous about your positions during a sell-off, make sure to – at the very least – not panic-sell.
Robert Ross
Robert Ross’s unique style of clear and direct stock research helped him build a massive following in the investment research industry, starting his career at investment research company Mauldin Economics and quickly rising through the ranks to become one of the youngest chief analysts in the industry. Today, over a million investors turn to Ross every month for his take on investing, economics, and personal finance. He now shares his unique insights in Total Wealth and Manward Money Report.
