Dancin’ in September

By Chris Cassidy, CEO

I love the month of September. The weather in Vermont is beautiful, foliage is beginning to turn, and delicious local apple treats abound. September is also the month of my wedding anniversary, so I tend to associate the month with happy memories of family and friends. Furthermore, who doesn’t like the Earth, Wind and Fire song?

As a Portfolio Manager, however, I’m not a big fan because it brings back memories of the crash of 2008. In September of that year, the S&P 500 fell by 20 percent in a single month as investors grappled with the Lehman Brother’s bankruptcy, American International Group (AIG) bailout and credit market illiquidity. It was a difficult month for managing assets.

Calendar year 2008’s record is just one example of poor market performance in September. In fact, September is historically, by far, generally the worst month for equity performance. From 1928-2022, the S&P 500 has lost an average of 1% every September. Furthermore, September is the only month with more negative return years (51) than positive return years (42) over that time period. Why is this?
S&P 500 AVERAGE PERCENT CHANGE 1928-2022 Month Return Month Return July 1.7% June 0.7% December 1.4% March 0.5% April 1.4% October 0.5% January 1.2% February (0.1%) November 0.8% May (0.1%) August 0.7% September (1.0%) *Yardeni Research, Inc.

There are many theories out there as to why September is such a poor month for equity performance. Some blame it on seasonal behavioral bias. Some blame it on lower trading volumes in the summer months that then increase in September.

Others note that many large mutual funds have a fiscal year that ends in September, and those funds often reposition their portfolios during the month. Whatever the reason, September has not been kind to investors despite the gorgeous weather.
In contrast, I tend to dread December and January, personally. Despite being a lifelong Vermonter, I am not a skier nor a snowboarder, I do not enjoy shoveling snow, and I am not a fan of sub-zero temperatures.

However, for a Portfolio Manager the months of December and January are historically two of the best months for stock market performance. In fact, since 1928, the S&P 500 has returned an average 1.4% in December and 1.2% in January. Further, December has the greatest ratio of positive return years (69) to negative return years (25) of any month.

December has been such a good month for equity returns that many pundits use the phrase “Santa Clause Rally” to describe the phenomenon. Some attribute this market strength to holiday investor optimism. Some claim it is due to the end-of-year investment of bonuses and retirement plan contributions. Others believe that it’s attributable to investors wanting to commit funds ahead of the month of January, which is historically a strong month for returns.

As you can see, historically, it has made sense to hold onto high-quality securities throughout September, rather than sell on the potential seasonal weakness, in order to take advantage of the higher possibility of good returns in the wintertime.
Similarly, this year I am going to freeze a couple of locally made Vermont apple pies to enjoy in the winter months. This way I can savor the sweet taste of September during the winter period that is historically more positive for equity market performance. Who says that you can’t have your apple pie and eat it too?