The S&P 500 has a history of underperforming in September.
Volatility rises in the month as traders reposition their portfolios.
Several market-moving events could make this September especially unique.
As August closes out the summer season, the S&P 500 may soon take its own holiday.
On average, September has been the worst month for the benchmark index going back as far as 1928. Not only do stocks regularly underperform, it's also not unusual for the market to end the month with a negative return.
According to CME Group data from last year, the S&P 500 has lost ground in 55% of Septembers over the the last century. More recently, the index has dropped for the last four years, Deutsche Bankadded.
A big culprit is the higher trading volumes as Wall Street gets back to work after Labor Day.
With more traders out on vacation during the summer months, stock activity tends to lag, resulting in stronger market performance amid thinner trading volumes.
SoFi's Liz Young Thomas noted that S&P 500 monthly trading volumes average 15.2 billion shares between June and August. But when investors return to their desks in September, volume jumps to 17.2 billion shares.
"People are coming back in and starting to trade again. You've just got more activity in the market, which can lead to volatility," the head of investment strategy told Business Insider, adding: "Just naturally, people might take a look at portfolios and say: 'I'm a little overweight the Mag Seven, or I'm a little overweight large-cap equity, or I'm just overweight equity in general.''"
September experiences some of the year's most volatile swings, and 2% moves in either direction are a norm for the S&P 500, she said. Although volatility continues through the fall, September stands out for the fact that downside swings widely outweigh upside momentum, she said.
What to expect this year
A few market-moving events could make this September unique.
For instance, all eyes are on the Federal Reserve's policy meeting on September 18. Interest rate cuts are widely expected, a move that's generally framed as positive for the bull rally.
However, according to LPL Financial's Adam Turnquist, this could shift based on the upcoming August jobs report due out on September 6.
If the labor print is weaker than expected, the Fed might pursue deeper rate cuts, which would be an acknowledgment of a weakening economy.
"In the event we get a little bit better economic data next week, the soft landing narrative gains a little bit more momentum, and we potentially buck the losing streak we've seen over the last few years in September," the chief technical strategist Adam Turnquist told BI, but outlined that downside risk looks more probable.
Beyond September, election jitters can only extend seasonal volatility.
SoFi's Young Thomas noted that heightened volatility peaks in mid-October during election years, not at the end of September.
However, that's frequently followed by a relief rally once the results are known, she said.
How to prepare
Portfolios shouldn't be readjusted because of seasonal shakiness, each expert told BI — that's both hard to forecast and not a fundamental long-run input.
But for those thinking about the months ahead, Young Thomas suggested that investors pay attention to how the trading environment might soon change.
"You have to sit back and think: 'Well, okay, what typically does well during a steepening yield curve, yields falling and a falling dollar?" she said, referring to three outcomes implied by an interest rate cut.
In this context, dividend-paying stocks could be worthwhile, she said. As yields fall, Treasurys will lose their luster, sending investors in search of other income sources. Dividend stocks can benefit, she said, adding that they're typically concentrated in utilities and staples.
Meanwhile, dollar depreciation could boost healthcare, as a sliding greenback should prompt medical exports to rise, she said. Elevated trade activity would also benefit the aerospace and defense sectors.
Turnquist also noted that investors might do well to buy the seasonal dip.
"Buying the September or October lows has been a very good trade," he said. "October, things start to improve, and then you have this November, December, year-end rally, typically very high average returns and high positivity rates for those months."
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