by Brendan Roath, EA, CFP® and Rod Roath, CPA, CFP®
Money Matters, Inc.
Like many stock market axioms, “September Effect” is part truth and part myth. Translated, it means September brings higher volatility and weaker returns. Some factual basis exists for the claim. September is the only calendar month with a negative average return in the Dow Jones Industrial Index over the last 100 years. However, some believe bad things will happen and stock market returns will drop every September. Will the September Effect reoccur this month? We look at both “Yes” and “No” answers.
Past Performance
Looking at past performance to predict September investment results, the answer is “No September Effect this year”. Second quarter’s investment returns were very good. The S&P 500 Index increased 8.55%. We are now over two-thirds of the way through the 3rd quarter. Monthly S&P 500 total return for July was 2.38% and for August was 3.04%. Adding these two numbers together equals 5.42% or a monthly average of 2.71%. If we project September’s results to equal the July-August average monthly return, we have a S&P 500 3rd quarter rough estimate of 8.13%. An 8.13% return for the 3rd quarter is very good, slightly less than 2nd quarter’s results.
September Risks
Judging from news headlines during the first week of September, the answer is “Yes, September Effect will reoccur this year”.
- Weak August Jobs Report with less than ⅓ of the predicted number of new jobs created. Travel, restaurants, and entertainment businesses show net declines in employment numbers.
- Hurricane Ida devastated much of Louisiana and Mississippi and brought flooding the East Coast from Virginia to Connecticut.
- In the first week of September, over 153,000 new cases of COVID’s Delta variant have been reported. Parents are worried that schools will become a COVID breeding ground for children under 12.
- Supply chain disruption is placing a bind on industrial production. Long wait times and back orders discourage consumers from making larger purchases.
- Congress is debating a $3.5 billion infrastructure bill and deciding how to pay for the legislation, which will likely include income tax increases.
Each of these headlines increase the risk of lower investment performance in September. Almost on cue, the S&P 500 Index ceased its upward trajectory, leveled off and declined slightly so far in the first half of September.
September Effect - Yes or No
In light of the list of threats to the economy - we will likely see a September Effect this year. Expect higher volatility for the remainder of September and first half of October. Also, we could see a slight market correction.
Organizing Financial Success™ - www.money-matters.us