September has historically been the worst month for returns for U.S. stocks, but the second half of the month was particularly tough for investors.
In a report shared with MarketWatch on Monday, Ed Clissold of Ned Davis Research noted that since 1950, the last two weeks of September have been consistently the worst period for the S&P 500 over an entire calendar year, in terms of both median and average returns.
Additionally, in election years, weakness in late September tends to spill over into October.
It remains to be seen whether investors will see another self-fulfilling market prophecy come true, but there are reasons to remain optimistic this year despite the recent uptick in volatility.
Clissold noted that technical indicators for major U.S. stocks remain strong, and stocks rose last week on expectations of a 50 basis point interest rate cut by the Federal Reserve, suggesting expectations of a bigger cut are on the way.
“The Fed has pretty much given investors a heads-up on a rate cut. The rally last weekend on rumors of a 50 basis point cut shows that markets remain sensitive to Fed policy, even though Powell had previewed his plans. A friendly Fed would be able to better offset any seasonal downside,” Clissold said.
Even if the weakness arrives as expected, it may not last. Year-end stock market rallies tend to be stronger in election years, with weakness in September and October quickly followed by a strong rally in late November and December. These are two of the strongest periods for stock markets in election years.
Bottom line: Investors should consider seasonal factors when assessing portfolio risk, but they should never forget the old market motto: “Don't fight the Fed.”
