September is a famously bad month for stocks. Is the recent market retreat likely to gather pace? Investors should “prepare for the possibility of disappointing results”, cautions CFRA Research’s Sam Stovall, noting that historically September has easily been the worst month for stocks.
Research indicates the September effect, as it’s known, has been a feature of US and UK stock markets for some 200 years. September has also been the worst-performing month for multiple international markets.
But why? The absence of satisfactory explanations means it’s wise to assume September’s weakness is a statistical fluke. Now, stocks may well slip for any number of other reasons but there’s less reason for obvious near-term concern compared to a month ago.
Then, the S&P 500 was technically overbought after five consecutive monthly gains. Sentiment was frothy; one American Association of Individual Investors poll showed bullishness at levels unseen since April 2021.
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Since then stocks have pulled back as investors fretted over rising bond yields and the interest rate outlook. That pullback has relieved last month’s “excessive optimism”, says Ned Davis Research, suggesting September may not live up to its reputation as a grisly month for stocks.
