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The S&P 500 has historically underperformed in September.
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Volatility increases over the month as traders reposition their portfolios.
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Several market-moving events could make this month of September particularly unique.
As August concludes the summer season, the S&P500 may soon take his own vacation.
On average, September was the worst month for the benchmark index, dating back to 1928. Not only do stocks regularly underperform, it is also not unusual for the market to end the month with a negative return.
According to CME Group data compared to last year, the S&P 500 has lost ground in 55% of Septembers over the past century. More recently, the index has fallen over the past four years, Deutsche Bank added.
A big culprit is higher trading volumes as Wall Street returns to work after Labor Day.
With more traders on vacation during the summer months, stock activity often lags, resulting in stronger market performance on lower trading volumes.
SoFi’s Liz Young Thomas noted that the S&P 500’s monthly trading volumes averaged 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. There’s just more activity in the market, which can lead to volatility,” the head of investment strategy told Business Insider, adding: “It makes sense that people would take a look take a look at portfolios and say, ‘I’m a little overweight on the Mag Seven, or I’m a little overweight on big company stocks, or I’m just overweight on stocks in general.’”
September has some of the most volatile swings of the year, and 2% moves in either direction are a norm for the S&P 500, she said. Although volatility continues throughout the fall, September stands out for the fact that downward swings far outweigh upward momentum, she said.
What can you expect this year
A few market-moving events could make September unique.
For example, all eyes are on the Federal Reserve’s September 18 policy meeting. Rate cuts are widely expected, a move generally seen as positive for the bull rally.
However, this could shift based on the upcoming August jobs report, due September 6, according to LPL Financial’s Adam Turnquist.
If labor pressures are weaker than expected, the Fed could pursue deeper rate cuts, which would be an acknowledgment of a weakening economy.
“In the event that we get some better economic data next week, the soft landing narrative will gain some momentum and we may be able to break the September losing streak we have seen in recent years,” the chief technical strategist said. Adam Turnquist told BI, but outlined that downside risk seems more likely.
After September, election jitters can only increase seasonal volatility.
SoFi’s Young Thomas noted that increased volatility during election years peaks in mid-October, not late September.
However, that is often followed by an outreach meeting once the results are known, she said.
How to prepare
Portfolios should not be adjusted due to seasonal fluctuations, each expert told BI. That is both difficult to predict and not a fundamental input for the long term.
But for those thinking about the months ahead, Young Thomas suggested investors pay attention to how the trading environment could soon change.
“You have to sit back and think, ‘Well, OK, what tends to do well during a steepening yield curve, falling rates and a falling dollar?’ she said, pointing to three outcomes that result from a rate cut.
In this context, dividend-paying stocks may be worthwhile, she said. As interest rates fall, government bonds will lose their luster, causing investors to look for other sources of income. Dividend stocks could benefit, she said, adding that they tend to be concentrated in utilities and commodities.
Meanwhile, the dollar’s depreciation could give a boost to healthcare, as a falling dollar should boost medical exports, she said. Increased trade activity would also benefit the aerospace and defense sector.
Turnquist also noted that investors would do well to buy the seasonal dip.
“Buying the September or October lows has been a very good trade,” he said. “In October, things start to improve, and then you have this year-end rally in November and December, typically very high average returns and high positivity rates for those months.”
Read the original article Business insider