The S&P 500 (SPX) faces adverse seasonality as August marks the end of summer. On average, September has been the worst month for the benchmark stock index since 1928, with not only regular underperformance but also negative returns at the end of the month.
The S&P 500 has fallen in 55% of Septembers over the past century, according to CME Group data from last year. Deutsche Bank added that the index has fallen in September in the last four years.
One big reason is increased trading volume as Wall Street returns to work after the Labor Day holiday.
Stock activity tends to lag in the summer as more traders go on vacation, leading to stronger market performance on lower volumes.
Liz Young Thomas, head of investment strategy at digital financial services company SoFi, noted that monthly trading volume for the S&P 500 averaged 15.2 billion shares between June and August. But when investors returned to their desks in September, trading volume jumped to 17.2 billion shares. “People are back and trading again,” she said.
“More active markets can lead to volatility,” the investment strategy chief said. “People may naturally look at their portfolios and see that they are slightly overweight to the Big Seven, or slightly overweight to large-caps, or just generally overweight to stocks.”
September is the most volatile month of the year for stocks, with 2% swings in both directions the norm for the S&P 500, she said. While volatility will continue into the fall, September stands out because the downward swings far outweighed the upward ones.
What's different this year
Several events may make this September different.
For example, all eyes are on the Federal Reserve's September policy meeting. A rate cut is widely expected, a move that is generally considered bullish for bull market rallies.
However, that could change based on the upcoming August jobs report, which is due out on Sept. 6, according to Adam Turnquist, chief technical strategist at LPL Financial.
If the labor data is weaker than expected, the Fed may seek a larger rate cut, which would be an acknowledgment of economic weakness.
“If the economic data gets a little better this week, the soft landing narrative will gain more momentum and we could reverse the losing streak of the past few years in September,” Turnquist said. But he also noted that downside risks look more likely.
After September, election jitters will only amplify seasonal fluctuations.
SoFi's Thomas noted that the peak of heightened volatility is in mid-October during election years, not late September. Still, once the results are known, there is often a sense of relief.
How to prepare?
Almost every expert says that portfolios should not be rebalanced based on seasonal fluctuations because they are neither easy to predict nor a long-term factor.
But for investors considering the outlook for the coming months, Thomas advises them to pay attention to how the trading environment may soon change.
"You have to sit down and think about it: What would typically do well in a situation where the yield curve is steepening, yields are falling and the dollar is falling? In that situation, stocks that pay dividends could be valuable," she said. "As yields fall, Treasuries will lose their shine and investors will look for other sources of income. And dividend-paying stocks could benefit, typically utilities and staples."
Meanwhile, a weaker dollar could boost the healthcare sector, as a falling dollar should lead to an increase in medical exports. Increased trade activity would also benefit the aerospace and defense sectors.
Turnquist also pointed out that investors might as well buy when the stock market is seasonally down. He said: "Buying at the lows in September or October has always been a very good trade. Things usually start to improve in October, and then rebound in November and December. The average return rate in these months is usually very high, and the probability of rising is also high."
Article forwarded from: Jinshi Data
