Why Stocks Drop in September—and Many Investors Shouldn't Care

Historically, September has not been kind to stock investors.

Since 1926, U.S. large-cap stocks have lost an average of 0.9% in September, according to data from Morningstar Direct.

According to Morningstar, September is the only month in that nearly century-long period where investors suffered an average loss. They made profits in every other month.

For example, February saw an average positive return of 0.4%. While this is the second-lowest performance of the 12 months, it still beats September by about 1.3 percentage points. July leads the way with an average return of about 2%.

The monthly weakness also applies when looking at more recent periods only.

For example, Standard & Poor's 500 The stock market index fell 1.7% on average in September since 2000 — the worst monthly performance by more than a percentage point, according to FactSet.

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Historically, the last two weeks of September are generally the weakest part of the month, said Abby Yoder, U.S. equity strategist at JPMorgan Private Bank.

“Starting next week, the situation is expected to become a bit more negative in terms of seasonality,” Yoder said.

Yoder added that investors who keep their money in stocks for the long term should not withdraw.

Financial experts say that trying to time the market is always a losing bet. That's because it's impossible to know when the good and bad days will happen.

For example, the top 10 trading days in terms of percentage gains for the S&P 500 over the past three decades have all occurred during recessions, according to a Wells Fargo analysis published earlier this year.

Moreover, large-cap stocks in the United States have had positive September returns half the time since 1926, according to Morningstar. In other words: They’ve been negative only half the time.

For example, investors who sold their investments in the market in September 2010 would have lost a 9% return that month — the best monthly performance that year, according to Morningstar.

“It’s all random,” says Edward Macquarie, a professor emeritus at Santa Clara University who studies historical investment returns. “Stocks are volatile.”

Likewise, investors should not necessarily accept the fundamental principles of the market as self-evident truths, experts said.

For example, the popular saying “sell in May and go” leads investors to sell their stocks in May and buy them back in November. The reason for this is that November through April is the best rolling six-month period for stocks.

In April, Fidelity Investments wrote: “History shows that this trading theory has flaws. Stocks tend to post gains throughout the year, on average. Therefore, selling in May generally does not make sense.”

Since 2000, the S&P 500 has gained an average of 1.1% from May to October over the six-month period, according to FactSet data. The stock index gained 4.8% from November to April.

There is a historical reason why stocks often performed poorly in September prior to the early 20th century, Macquarie said.

He said it was linked to 19th century agriculture, banking practices and the scarcity of money.

At the time, New York City had established itself as a powerful banking center, especially after the Civil War. Deposits were flowing into New York from the rest of the country throughout the year as farmers grew their crops and farmers' purchases piled up in local banks, which could not put the money to good use locally, Macquarie said.

New York banks were lending to stock speculators to earn a return on their deposits. In early fall, rural banks withdrew their New York funds to pay for farmers' crops. Macquarie said that speculators were forced to sell their stocks while New York banks were repaying the loans, causing stock prices to fall.

“The banking system was very different. It was systematic, almost yearly, and money always ran out in September,” he said.

This cycle ended in the early 20th century with the creation of the Federal Reserve, the US central bank, Macquarie said.

Experts said the September loss streak had become even more puzzling in modern times.

They said investor psychology was perhaps the most important factor.

“I think there’s an element of these narratives that feeds on themselves,” says JPMorgan’s Yoder. “It’s the same concept that a recession narrative leads to another recession. It seeps into the psyche.”

She said there were likely other contributing factors.

For example, mutual funds typically sell shares to lock in gains and losses for tax purposes—so-called “tax-loss harvesting”—near the end of the fiscal year, usually around October 31. Funds often begin giving capital gains tax estimates to investors in October.

Mutual funds appear to be “deferring” tax-deferred stock sales to September more often, Yoder said.

Yoder said investors' uncertainty about the outcome of the U.S. presidential election in November and the Federal Reserve's monetary policy meeting next week, when officials are expected to cut interest rates for the first time since the start of the Covid-19 pandemic, could exacerbate weakness in September.

“Markets don't like uncertainty,” she said.

But in the end, Macquarie said, “I don't think anyone has a good explanation for why this pattern persists, other than a psychological explanation.”