Why Is September the Worst Month for Stocks and Will 2021 be Better?

Mohit Oberoi, CFA - Author

Sep. 2 2021, Published 9:10 a.m. ET

There are many phenomena in stock markets. These include the trends related to months, like the December and January effect. We also have phenomena related to days of the week, like the Monday effect. As we enter September, history tells us that the month hasn’t been a good one for markets. Why is September the worst month for markets and will it be different in 2021?

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Another famous phenomenon in markets is “sell in May” since markets have historically been weak in the month. However, in 2020 and 2021 markets actually performed well in May. In 2020, they continued their rise from their March lows even as most fund managers were calling for stocks to fall.

Why September is the worst month for stocks

Some of the stock market phenomena can be defined by conventional logic. For example, stocks do well in December as companies launch new products that propel sales in the last month of the calendar year. Over the years, we have seen many “Santa Claus” rallies.

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Similarly, the phenomenon of the January effect can be attributed to buying after tax-related selling in December. However, the “sell in May” and September sell-off are harder to explain.

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History tells us that September is the worst month for stock markets. On average, stocks have lost 0.5 percent in September, according to Ryan Detrick, the chief market strategist for LPL Financial.

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Wake me up when September ends

Looking at the last few years, we saw a sell-off in September 2020 as the rally in growth and tech names faltered. These stocks were leading the markets in the preceding months even as the U.S. economy was battling the COVID-19 pandemic. However, in 2017, 2018, and 2019, stocks closed higher in the month. Historically, there have been more down months than up in September.

"Wake Me Up When September Ends,” which was ironically sung by a band named “Green Day,” sums up the market mood in the month. Will September 2021 be a bad month for U.S. stocks like it has been historically?

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Will U.S. stocks rise or fall in September 2021?

Let’s look at the key factors that would determine the price action in September 2021. The S&P 500 is up sharply for the year and has closed with gains for seven consecutive months.

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The rally strengthened over the last few months as corporate earnings generally surprised on the upside. While there were hiccups over the Fed’s tightening, Fed Chair Jerome Powell has sounded a reasonably dovish tone, which helped allay fears.

We can build a case for U.S. stocks being overvalued. However, markets have been running ahead of the historical averages for quite some time. To sum it up, U.S. stocks don’t look bloated at these levels.

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Several things could go wrong in September, especially from a geopolitical perspective. For example, the Taliban’s takeover of Afghanistan has led to a lot of uncertainty.

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Also, there's still uncertainty about the COVID-19 pandemic. New coronavirus cases are still high in the U.S. WHO is investigating another variant called “mu,” which could potentially get the better of immunity provided by vaccines or previous infections. If the coronavirus situation deteriorates more, it could have an impact on the markets.

Currently, there doesn't seem to be a real trigger for a stock market sell-off in September. If no unforeseen event happens, stocks could continue to rise in the month.


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