The September Effect
InsightsThis month, we want to talk a little bit about investing success. Let’s start with one of our favorite quotes, from the one of the greatest investors of all time:
“The most important quality for an investor is temperament, not intellect.” — Warren Buffett
The older we get, the more we have found this quote to be true. Throughout our careers, we’ve learned that investing success is largely a matter of behavior. It’s about mastering our impulses and emotions. It’s about staying disciplined and focused. It’s about concentrating on what we can control rather than stressing over what we can’t.
And the thing we can control the most is our own temperament.
This is especially important to remember in September. Why? Because every year, as the days get shorter and summer makes way for fall, investors will see a rash of headlines on how September and October are the worst months for the markets.
Here’s a sampling of this year’s headline harvest:
“Here’s why September and October are historically weak for stocks”
CNBC, September 11, 2024
“Is the ‘September Effect’ Going to Hit Markets Again?”
The Wall Street Journal, September 9, 2024
“S&P 500 just saw its worst first week of September since 1953”
MarketWatch, September 9, 2024
“September’s poor history is hard to ignore”
CNBC, September 3, 2024
“September Lives Up to Its Reputation for the Stock Market”
Barron’s, September 3, 2024
Now, there’s definitely some truth to all these headlines. The average September is historically the worst performing month for the stock market.1 Over the last four Septembers alone, the S&P fell by 5%, 9%, 5%, and 4%, respectively.2 October, meanwhile, has also tended to be historically volatile.Some people refer to this as the “September Effect.” It’s a name that sounds like the title of a mediocre sci-fi thriller, but it’s easier to say than “September Market Anomaly” so we’ll go with the movie title.
Why do September and October tend to be so volatile? Unfortunately, despite a lot of research on the subject, no one has found a single causal link that can explain it. (Certainly not one that repeats year after year.) However, there are plenty of theories about the September Effect. Here are three of the most plausible:
- Cashing In. With summer vacation over, many investors look to lock in their gains for the year, so they have money for education expenses, paying off debts, and holiday shopping. Since you have to sell stock to realize your gains, this causes the overall markets to slide.
- Taxes. Institutional investors – mutual funds, pension funds, endowments – often end their fiscal year September 30, so they sell in September to harvest their tax losses.3 (This means they sell some holdings at a loss to reduce the taxes they owe on capital gains.)
- Psychology. A third explanation is that the September Effect has become something of a self-fulfilling prophecy. Since investors expect the markets to decline in September, they sell in order to get out before that happens. (Ironically, triggering the very slide they wanted to avoid.) There is some evidence that more investors are starting to sell earlier in anticipation of September, which explains why August can sometimes be volatile, too.
Of course, in any given year, you can always find more topical reasons to explain the markets. For example, right now, investors are worried about the unemployment rate, and whether the Fed waited too long to lower interest rates. Others are concerned about companies that have invested heavily in artificial intelligence. (AI hype has been one of the biggest drivers of the current bull market. Lately, though, some of that hype has begun to die down as investors wonder whether the technology is all it’s cracked up to be.) And of course, there’s the upcoming elections.
But here’s where things can get dangerous for investors. Not because the markets sometimes decline in September and October, but because it’s those months when too many investors start prioritizing intellect over temperament. Meaning, they start overthinking it rather than controlling their behavior.
While it’s true that, on average, September is the worst performing month of the year, that doesn’t tell the whole story. In some years, September is the best performing month. Some years, the markets may dip dramatically early in the month and then rebound sharply towards the end. Furthermore, even if the September Effect is real, it’s just one month. If you were happy with your portfolio going into the month, if you feel you own quality investments, why would you make decisions based on a 30- or 60-day timeframe instead of the whole year? And finally, while September is historically the weakest month for the S&P 500, November and December are historically two of the best.1 But it can be much harder for investors to take advantage of that if they are trying to buy their way back in.
This is why it’s so important to prioritize behavior and temperament during months like this, when we see headlines like the ones above. The media is trained to make every headline seem like a huge event. It’s how they sell copies and generate clicks. Nobody would read an article or watch a video if the headline were, “Everything’s normal!” As a result, it’s very easy to get distracted from the long-term view by the short-term emotions that headlines can provoke.Here's how we like to think of it. Imagine someone who has begun going to the gym to increase their fitness. There are all sorts of machines and equipment, and dozens of potential exercises to choose from. But the person who will be truly successful at reaching their fitness goals isn’t the one who chooses the smartest machine. It’s the one who keeps going to the gym every single day. It’s the one with the right temperament. It’s the one who doesn’t quit.
The same is true of investing.
Make no mistake, the average September can be a rough one for the markets. October can sometimes be volatile, too. And over the next few weeks, there will be all sorts of statistics and storylines that can distract us from our long-term path. Interest rates. Inflation. Consumer spending, housing, unemployment. The election. While it’s always important to know what’s going on, they are still just today’s headlines, destined to be replaced by something new tomorrow.
That’s why, here at Fidelis, we will focus more on what lasts: Our long-term strategy and your long-term goals. We will continue to prioritize our behavior and our temperament over everything else. Because, in the end, that is what we can control.
As always, please let us know if you have any questions or concerns in the coming months. We will always be here to help you in any way we can.
Have a great month!
Resources: