You’ll often hear in the world of finance that certain times of the day, week, or year are more favorable or unfavorable for investment. The common belief is that the stock market generally sees its weakest performance in the month of September. According to the “Stock Trader’s Almanac,” this month has historically been the poorest performer for the three major stock market indices.

This recurring downturn has been labeled the “September Effect.” 

Between 1928 and 2021, the S&P 500 has seen an average drop of 1% during September.

However, this is a long-term average, and September isn’t necessarily the worst-performing month every year.

While the September Effect is an observed market pattern, it’s not tied to any specific market events or news. Its impact has also lessened in recent times.

In the last quarter-century, the average monthly return for the S&P 500 in September has been around -0.4%, while the median monthly return has actually turned positive.

Moreover, the frequency of major declines in September has diminished compared to before 1990. One theory suggests that investors now sell off in August, strategically positioning themselves ahead of September.

The September Effect isn’t exclusive to the U.S.; it also manifests in some global markets.Analysts speculate that this downswing could be the result of seasonal shifts in investor behavior as people return from summer vacations and decide to liquidate assets.

Another contributing factor might be mutual funds cashing out to realize tax losses. One additional hypothesis suggests that during the summer, trading volumes are generally low because many investors are on holiday, refraining from active trading.

As the autumn season kicks in and these investors return to their regular schedules, they start offloading stocks they’d planned to sell. This leads to a surge in selling activity, which subsequently causes the market to dip.

Furthermore, many mutual funds close their fiscal year in September, leading managers to sell off underperforming assets before this deadline. This selling activity is another possible contributor to September’s typically lackluster market performance.