Should You Buy Stocks in September? Here's What History Says. – The Motley Fool

September is not known as one of the best months for stock market performance. Over the past century, S&P 500 On average, the S&P 500 index has fallen in September, a phenomenon known as the “September effect.” For the past four years, this trend has continued, with the index falling between 4% and 9%. This trend has continued so far this year, with the S&P 500 on track for a decline of more than 3% in September — and it's still early in the month.

The declines in September were broad-based, especially among retailers and other businesses. Dollar Generalthe technology giant Super Microcomputera biotechnology company Moderna They've posted double-digit losses and are among the 10 worst-performing companies in the S&P 500 so far. All three have risen earlier this year, with Supermicro soaring 188% in the first half. As September results come out, some may be wondering whether to buy or avoid stocks this month. Here's what history has to say.

What's behind the September Effect?

First, let's take a quick look at what's behind the September effect. Analysts speculate that the reason for the decline in stock prices may be related to portfolio managers returning from summer vacation and adjusting their portfolios. It's also possible that these managers are engaging in some kind of spurious maneuvering, such as buying or selling certain assets to boost performance before the end of the year. However, no one really knows why stock prices usually fall in September.

Now, let's look at what history shows us about this situation: if we look at September declines over the past four years, we see that the indexes have risen in the three months that followed: The S&P 500 rose 11%, 10%, 7%, and 11% in the final three months of 2020, 2021, 2022, and 2023, respectively. In other words, recent history shows that even after a September downturn, markets can recover and even post double-digit gains.

Even better, if you look at a time series of the S&P 500's performance over, say, the past 10 years, you'll see that after every dip, whether it was in September or any other time, the index has seen a big rally.

^SPX data Y Chart

All of this points to one thing: History has shown us that the September Effect is a temporary situation that is unlikely to set the market back for an extended period of time. And this suggests that a potential September selloff should not scare you away from the stock market.

The stock is trading at a discount

In fact, now is a great time to buy stocks, because many solid stocks with excellent long-term prospects are trading at discounts due to the recent sell-off. For example: NVIDIA (NVDA 3.54%)Samsung Electronics, a leading maker of artificial intelligence (AI) chips, has soared more than 100% in the past year. Its shares have fallen about 12% since the beginning of the month and are trading at 36 times forward earnings, down from nearly 50 times just a few months ago.

alphabet (Google -1.57%) (Google -1.33%)The Google parent company has made another great buy at a time when its stock price has fallen: Its shares have fallen from more than 24 times estimated earnings in July to now be trading at 19 times. The company dominates the internet search market and its cloud-computing business is growing at double-digit rates.

History has shown us that in recent years, a poor September has led to a year-end rally. Even if this trend does not repeat, we know that over time the S&P 500 will always get out of tough times and continue to rise. This does not mean that all stocks will rise in the future. But if you choose companies with proven track records, and add in a few new unknowns that have the potential to rise for sure in the future, you are more likely to win in the long run. And history shows us that now is the perfect time to start or add to this exciting portfolio.