Seasonality has been the subject of numerous academic and professional investment studies. Some of the more popular seasonality trends include (1) Sell in May, and go away; (2) Summer Rally; (3) the January Indicator, (4) the October crash month barometer; (5) Santa Claus rally; and (6) September Effect.
Seasonality often refers to a particular timeframe where stocks, sectors, market indices are subject to and influenced by recurring tendencies that produce reliable trends. Tendencies refer to weather conditions (winter versus summer, fall versus spring, and year-end versus the start of the year) and calendar events (end of the month/quarter/year versus the beginning of the month/quarter/year).
What are the seasonality studies saying about September and the months ahead?
The September Effect often starts on Labor Day, a US national holiday, typically held annually on the first Monday of September. This year, Labor Day falls on Monday, 9/6/21. Labor Day marks the end of the summer and the beginning of fall. For many, this is also the start of the new school year and new business year.
For the first half of the century, September has been a consistent and often reliable seasonality barometer. It is the biggest percentage loser on both the S&P 500 Index and the Dow Jones Industrial Average and one of the weakest months of the year.
September is a month of lackluster stock market returns and an increase in market volatility. Beginning of September, the days before and after Labor Day tends to be more favorable than toward the end of the month. The discrepancy in performance may be due to the end-of-quarter portfolio restructuring and window-dressing activities.
Although the stock market has an inherent long-term upward bias (bull trend), and September and October tend to rise more often than not, investors tend to be increasingly nervous during this timeframe. There is a collective sigh of relief once September has passed, as the stock market typically rallies strongly into the end of the year.
Enclosed below are the September and the monthly seasonality statistics for major US stock market indexes during September over the past 20-years. Also included are the monthly performances for the US stock market indexes in the past 20 years.
S&P 500 Index (SPX – 4,524.09)
-0.4% September average return over the past 20-years (2002-2021)
1.0% October average return over the past 20-years (2002-2021)
With the strong year-to-date returns of 22.25% (as of 9/1/21), SPX is on track to match the mid-to-high 20% returns established during 2019 and 2013.
Dow Jones Industrial Average (INDU – 35,312.53)
-0.2% September average return over the past 20-years (2002-2021)
1.1% October average return over the past 20-years (2002-2021)
With current year-to-date gains of 16.84% (as of 9/1/21), INDU is on track to match the low-to-mid 20% returns from 2019, 2017, 2013, and 2003.
NYSE Composite Index (NYA – 16,845.99)
-0.3% September average return over the past 20-years (2002-2021)
0.7% October average return over the past 20-years (2002-2021)
With the current year-to-date gains of 17.18%, NYA is approaching the low-to-mid-20% returns from 2019, 2013, 2009, and 2003.
Nasdaq Composite Index (COMPQ – 15,309.38)
-0.1% September average return over the past 20-years (2002-2021)
1.9% October average return over the past 20-years (2002-2021)
With the strong year-to-date returns of 20.56% (as of 9/1/21), COMPQ will need a significant rally over the next four months to match the low-to-mid 40% YTD returns established during 2020, 2009, and 2003. The more likely scenario would be achieving the low-30% YTD returns from 2019 and 2013.
Nasdaq 100 Index (NDX – 15,611.67)
-0.1% September average return over the past 20-years (2002-2021)
2.6% October average return over the past 20-years (2002-2021)
With the current stellar year-to-date gains of 22.98%, NDX will need a rally aggressively into the end of the year to achieve the low-to-mid 40% YTD gains from approaching the low-to-mid-20% returns from 2020, 2009, and 2003. It is reasonable to expect NDX to approach the 30% YTD gains from 2017 and 2013.
S&P 400 Mid-Cap Index (MID – 2,760.22)
-0.4% September average return over the past 20-years (2002-2021)
0.7% October average return over the past 20-years (2002-2021)
With the strong year-to-date returns of 21.63% (as of 9/1/21), MID will stage a significant rally into the end of the year to match the low-to-mid 30% YTD returns from 2009 and 2003. At the current rate, NDX is more likely to achieve the mid-to-high 20% YTD returns from 2013 and 2019.
S&P 600 Small-Cap Index (SML – 1,371.33)
0.0% September average return over the past 20-years (2002-2021)
0.8% October average return over the past 20-years (2002-2021)
With impressive year-to-date returns of 23.5% (as of 9/1/21), SML is on target to achieve the mid-30% YTD returns from 2013 and 2003.
iShares Micro-Cap ETF (IWC – 149.65)
0.6% September average return over the past 17-years (2005-2021)
-0.6% October average return over the past 17-years (2005-2021)
With year-to-date returns of 27.10% (as of 9/1/21), IWC can replicate the high-30% YTD returns from 2013.
MSCI EAFE Index (EAFE – 2,356.42)
0.0% September average return over the past 20-years (2002-2021)
0.7% October average return over the past 20-years (2002-2021)
With year-to-date returns of 6.38% (as of 8/31/21), it will be difficult for EAFE to replicate the low-to-high 20% YTD returns from 2017, 2009, 2006, and 2003.
MSCI Emerging Market Index (EMF – 1,308.67)
0.5% September average return over the past 20-years (2002-2021)
1.2% October average return over the past 20-years (2002-2021)
With year-to-date returns of -3.31% (as of 8/31/21), it is unlikely EMF can achieve the 50-60% YTD returns from 2009 and 2003. In the past 20-years, EMF has generated negative returns seven times (2018, 2015, 2014, 2013, 2011, 2008, and 2002).
Conclusion:
Except for IWC (+0.6%), EMF (+0.5%), SML (0.0%), and EAFE (0.0%), September is a negative month for most of the major market indexes over the past 20-years. The consolidation during September typically sets the stage for a strong rebound during October, leading to the year-end rally. October is a especially strong month for NDX (+2.6%), COMPQ (+1.9%), EMF (+1.2%), and EAFE (+0.7%).
The market weakness sustained each September often leads to buying opportunities as most markets rebound strongly in October. The gains from October tend to ignite year-end rallies for most of the major market indexes.
Although many say September is the worst month for investing, the seasonality studies suggest buying the dips during September decline can lead to a rebound during October that sustains into the early parts of next year. Maybe investors should ignore the old Wall Street adage “sell in May, and go away.” Based on the seasonality studies, perhaps the better saying should be “buy the dips in September and hold until April.”
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