S&P 500 and the ‘September Effect’

Stock markets tend to fall on average through the month of September. Why, and will this month be an exception or fit in the trend?
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Understanding the September Effect

Since 1928, the S&P 500 has averaged a loss of about 1% through September and closes in the red about 56% of the time. This is often called the "September effect", but of course, each year is different.

In general, stocks tend to advance through the summer with lower volume. After US Labor Day, volumes tend to pick up, and markets trend in the opposite direction. During the summer, the S&P500 rose over 17% until August 16. Since then, it has given back 8%. Even after falling through the early part of this month, it's still 7% above its Jun 16th low. Does that mean more pain is in store for the market?

Predicting the future

There already was a bear market before the start of the summer rally, and a resumption of the downward trend kind of points to the July and August buoyancy being simply a bear or suckers rally. The Fed is set to raise rates again at the end of the month, and increase the rate of treasury run-off.

On the other hand, the Fed's GDPNow tracker is forecasting 2.6% growth for the second quarter, based on the data released so far. Three-quarters of companies reported earnings above expectations last quarter. But for the third quarter, more companies (62) provided negative guidance than companies providing positive (40).

With inflation well above target, US firms are likely to keep facing pressure from both sides. Customers are increasingly unhappy with ever higher prices, but rising interest rates cut into the cost of credit. It will take something extraordinary to relieve the downward pressure on stocks.

On the charts

Key takeaways

The “September Effect” shows that the S&P 500 has a 56% chance of closing the month 1% lower, but every year is different. The index rose 17% in the summer run up to August 16 and has fallen 8% since; however, it is still 7% above June’s low.

It’s unclear whether this indicates more pain for the market as a bear market had already begun before the summer rally. But Fed is set to raise rates again in September and most companies provided negative guidance for Q3 as they lose clients due to higher prices and inflation. On the other hand, the Fed's GDPNow tracker is forecasting more growth for Q2, but this is unlikely to relieve the downward pressure.