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Why is September the worst month for stocks?

September has just concluded. It's the worst month for the stock market since March 2020. Likewise, it's also the worst month for my portfolio. You can read about it here.

Here's a table showing the performance of S&P500 over the past few years.

As you can see from the table, September hasn't been a good month for the past few years. The performance of the market in September last year was not too good either with a near 4% drop. On average, it's one of the poorer months together with February and March. If you look at Q3 performance this year, the stock market didn't really do very well. For the patrons, I have highlighted that the selling signal is stronger than the buyer signal in July.

When you go deeper in the history (all the way to 1928), you will notice that the month of September generated an average stock market return of -0.1% with a win ratio of only 46%. This anomaly is so apparent that there's even a name associated to it. That is "September Effect". You can even find it on Investopedia.

So why is there such an anomaly in the market especially when there isn't any specific event that happens in September annually to cause such a decline?

There are several reasons for it.

Firstly, some mutual funds have their fiscal year ending in September. As part of their closing, they might sell/cash in on their holdings to harvest tax loss. If you are wondering what is harvesting tax loss, it means to sell some investments at a loss so that you offset some gains which you made elsewhere from other investments. Since taxes are made on your net profit, you end up paying less taxes. This is more applicable in countries where there are capital taxes. With the increased selling activities by these mutual funds, it was believed that this perpetuated a selling cycle in the market hence the dip in September. However, probably only 10% of mutual funds have their fiscal year ending in September so this might not be so true after all.

Secondly, it could also be a seasonal behaviour. September marks the end of summer. As traders return back from their summer holiday, they might sell/cash in on their holdings to prepare for the quarter. Not exactly a strong reason either.

Thirdly, this might all be a reinforcing cycle of belief. People fulfil their own prophecies. You believe that September will be a bad month and hence do more selling in September to protect your portfolio and this sets up a domino effect across the market. This is probably a more realistic reason to believe in.

If you believe September to be a month of gloom, let's hope October does not turn out to be what it is like the past few years. November and December tend to be really good months for the stock market so here's hoping for a better Q4 this year.

I also do share some useful content or articles I have read in my Telegram channel. Do join the channel if you are interested.

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