Worried About September Stocks Drop? Don’t. Here’s Why.

Since the market has only suddenly — and measurably — fallen since late August, it’s understandable that investors are worried that September will live up to its bearish reputation. It’s one of just three months of the year where S&P500 tends to lose ground, but with an average loss of almost 0.9%, it’s also the most painful of the three. Depending on the year, this month has dealt out a lot worse. That’s what makes this year’s early September weakness so worrisome; it could be a sign of things to come.

But before you panic and dump all your stocks, you should take a look at all the relevant information surrounding this phenomenon. The best course of action is probably to do nothing and just ignore what looks like the beginning of a predictable September swoon.

September Market Statistics

For the record, there is some truth to the idea that September is a bad month for stocks. Since 1950, the S&P 500 has lost ground in 42 of the last 74 Septembers and gained in only 32 of them. The average loss of 3.75% in a down year is also larger than the average gain of 3.25% in a gain year. Indeed, going back a century, this ill-fated month has lost ground more often than it has gained.

Part of this trend, and its large average losses, can be attributed to a coincidence of bad luck. For example, both Septembers after the dot-com crash in 2000 were difficult, but not because the implosion of so many young dot-com companies simply took shape in the fall of those years. The greatest impact of the 2008 subprime mortgage crash was also felt in September of that year, but it could have happened any other month.

That said, there is something about the calendar that could play a role in this particular month’s woes. Back when agriculture was one of the largest industries in the U.S., this was when the crop yields for the year would start to become clear, potentially weighing on ag banks. It has since been theorized that the end of the summer vacation allows investors to start taking a closer look at their portfolios, pricing in any bad news that may have been overlooked up until now. It is also worth noting that while the U.S. government’s fiscal year officially begins in October, the budget begins to be set in the weeks leading up to it.

All of these factors (and others) may or may not apply, but regardless of how applicable they were, they now fuel a self-fulfilling prophecy that typically turns September into a losing month.

Just don’t let any of this influence your short-term decision about your long-term positions.

The rest of the story

While September is more of a downer than a upter, there’s a noteworthy detail in the data worth mining: Most of the sell-off in September was followed by similarly large rallies in October.

The numbers: In 28 of the 42 September declines since 1950, the S&P 500 actually posted a gain the following month. The average performance from early September to late October over that 74-year period is actually a modest 0.14% gain over two months. Since 1950, the September-October time frame has left the S&P 500 only 29 times lower instead higher towards the end. Indeed, in some of the worst years the index has rebounded from a terrible September, Great October.

Simply put, any misfortunes that typically occur in September tend to subside the following month (and vice versa, by the way).

Things get even more promising when you stretch that time frame: In the six months from early June to late November, the S&P 500 has lost ground only 26 times since 1950, while rising in 48 of those years, averaging a 1.76% gain despite the occasional sell-off.

Sure, a few of those were still pretty tough. But they were also the ones where extraordinary circumstances arose that weren’t necessarily tied to the season…like in the middle of a bear market! Those very “unconforming” years include the subprime mortgage crash of 2008 and the aftermath of “Black Monday” in 1987. Before that, the last time an entire fall was just a terrible time for the market was 1973, when we were in a recession-fueled, inflation-driven bear market.

In addition to being unpredictable, such traumas are also simply rare. Trying to predict them often does more harm than good, pushing you out of the stock market when you should stay in it.

Don’t forget: it’s still about the bigger, long-term picture

This year could be one of those exceptions, of course. That means both September and October could be terrible months in a row for the broad market. Never say never.

From a bookmaker’s perspective, however, that’s unlikely. Statistically, any weakness experienced in September could be just a minor setback, and that setback will give way to the usual year-end bull run that usually begins to form in the second half of October. The main reasons for the catastrophic Septembers are simply not on the horizon, and a key counterindication to the bull run is that at least some economists see risk. The fact is that most bear markets and recessions start when most people don’t expect them.