Warning: September Is the Worst Month for Large-Cap Stocks

Seasonality patterns don’t always play out, but they’re a useful guide for investors generally. After all, the immediate future may be hard to predict, but at least we have data from the past to help us know when to scale in and when to scale back.

September is the month when trading volumes start to pick back up after summertime slowness. Yet, higher volumes don’t necessarily translate to higher asset prices. August saw a narrow decline in large-cap stock indexes after months of huge gains, and September through October are notorious months for weakness and even market crashes.

Perhaps this explains the old saying, “Sell in May and go away, and don’t come back ’til Halloween day.” If seasonality patterns play out as expected this year, it’s not a terrible idea for large-cap stock investors to sit on the sidelines for a month or two.

This time around, stocks are particularly vulnerable to a drawdown since the market spent the first half of 2023 pricing in near-term interest-rate cuts. It’s evident now that there will be no rate cuts this year, and it’s quite possible that there will be one or more rate hikes coming.

In addition, the S&P 500’s steep rise this year is attributable to a small handful of stocks – the so-called “Magnificent Seven” technology stocks – carrying the entire index higher. Since the S&P 500 is weighted by market cap, it’s possible for just a few stocks to have an outsized influence on the index.

Hence, while the S&P 500 may be weak in September, the tech-heavy NASDAQ is particularly prone to a pullback. As the old saying goes, the bigger they are, the harder they fall – or maybe the right saying for September will be: Stairs up, elevator down.

Sam Stovall, chief investment strategist at CFRA Research, crunched the numbers and found some disheartening results. Since 1945, the S&P 500 has delivered an average monthly return of -0.73% in September, and that’s the worst average performance of any month.

Courtesy: MarketWatch

Furthermore, Stovall’s research also found that September is the only month in which the S&P 500 has sustained more monthly declines than increases, with a “win rate” of just 44%. As for the NASDAQ index, it has delivered an average return of -0.86% in September since 1971.

Stovall made no bones about the bumpy ride that may be in store this month. “As a result of September’s track record for benchmark beatings, we remind investors to prepare for the possibility of disappointing results for both the S&P 500 and Nasdaq in the month ahead,” he warned.

I’m rife with old financial market sayings today, so here’s another one: If you want to know what’s really going on in the stock market, look at the bond market. Indeed, surging bond yields and plummeting bond prices signal trouble ahead for large-cap stocks.

With alarmingly high bond yields in focus, Richard Saperstein, chief investment officer at Treasury Partners, put August’s stock-market volatility in context. “The stock-market pullback in August was warranted as multiples expanded rapidly and yields on the 10-year Treasury surged, suggesting inflation and rates will remain higher for longer,” Saperstein explained.

Now, if you want to get down to the finer details of historical seasonality trends, the entirety of September might not be weak. I’m not suggesting trying to time the stock market with this information, but the last couple of weeks of September could be the time when trouble emerges.

Courtesy: @RyanDetrick

If a downturn might be in store during September’s last couple of weeks, this could be a good time to examine what’s currently in your portfolio. Maybe you caught a lucky break with some large-cap tech stocks this year. If so, taking some profits is a way to sidestep potential problems in September.

Take note, however, that’s I’m only referring to large-cap stocks here, and especially the “Magnificent Seven” tech stocks with high valuations. There are still pockets of value to be found in small and mid-sized companies, as well as in certain commodities.

Gold still hasn’t had its big breakout this year, and I’d say it’s long overdue. Plus, Bitcoin’s pop-and-drop may have shaken out some amateur traders, but anything under $30,000 is still an opportunity for true Bitcoin believers.

Ultimately, seasonality patterns can be a useful tool, though they shouldn’t be your only guide. Just keep the historical data in the back of your mind in September, and consider buying what’s on sale rather than what’s on the front page of the mainstream financial media.