For the most parts, stocks have been having a pretty solid year with the S&P 500 climbing 17.4% from January through August and the TSX up 4.68% over the same period. These gains come despite stubbornly high inflation, high interest rates, and ongoing fears about a recession.
Even the Cboe Volatility Index (VIX), which is dubbed the “fear gauge” on Wall Street, is sitting below historical averages. But, if history is any indicator, the so-called September Effect could usher in a period of instability.
How Are Stocks Doing in September?
September is traditionally the weakest month of the year for the stock market. Going back to 1928, the S&P 500 has averaged a 1.1% decline in September. It’s not alone. The Down cools an average 1.08% in September, going back to 1896 with the Nasdaq off 0.85% since 1971.
And so far, September has been a less than stellar month, with the S&P down close to 1%. The TSX is faring a little better, up 2.0%. The Dow Jones Industrial Average, meanwhile, is down 0.16% and the Nasdaq is off 1.5%.
September has little competition when it comes to bad performance. Even October, which gets a bad reputation for stocks, generally sees all major indexes rise.
Why are stocks down this September? Much of the volatility is centered on strong economic data which could force the fed to consider raising interest rates for longer than expected.
The Federal Reserve Bank of Atlanta’s GDPNow, which updates its GDP forecasts after each economic release, expects real economic growth of 5.6% in the third quarter. This has led Boston Federal Reserve President Susan Collins to suggest the U.S. central bank will need to keep interest rates higher for longer.
Stocks could get a big injection though later this month. On September the 20th the Federal Reserve will announce its next move on its overnight interest rate. If the Fed leaves rates unchanged investor optimism could return and send equities higher. But, if concerns about the global economy, interest rates, and yields persist, it could overshadow the markets well beyond the September Effect.
On the plus side, short-term losses are generally followed by short-term gains, and vice versa. And stocks rise more than they fall over the long-term. Declines are generally concentrated over short chaotic periods.
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