Will September Be a Good or Bad Month for Stocks?

In life in general, the start of a new month is in some ways a natural turning point and is often a time for reflection and contemplation of what the future holds. Logically, that isn’t the case when it comes to trading and investing. Markets are moved by the volume and intensity of buyers and sellers, which in turn are, in theory, driven by fundamental conditions such as the profitability of individual listed companies, the state of the economy, and the outlook for both of those things. The date has nothing to do with it. That is the theory but, whether a result of coincidence or not, seasonality in markets exists, and that should worry investors as we move into September.

The reason is simple; if you go back to 1950, September is one of only two months in the calendar where stocks have, on average, recorded negative returns. The other is August, a trend that was confirmed over the last four weeks, when the S&P 500 recorded a 3.5% decline. The average August loss over the last seventy years or so has been 0.13%, whereas for September, it has been 0.69%, which suggests that moves down that begin in August often gain steam in September. If that is the pattern this year, we are in for a rough few weeks.

It is not unreasonable to expect that outcome based on fundamental conditions and prospect, either. The Fed is aggressively raising rates and, as Jay Powell so helpfully central-bank-splained to investors last Friday at Jackson Hole, rate hikes can damage the economy and slow growth. In fact, that is what they are designed to do, so if that isn’t the outcome, this series of hikes will be deemed a failure. The remedy for that failure is, you guessed it, more rate hikes!

The problem that the Fed faces, as I have mentioned before, is that they have to decide when just enough damage has been done, and stop hiking rates before pushing the economy into a nasty recession. That is possible and has been done in the past, but the way they assess the impact of policy changes makes it far more likely that they overshoot the mark. That was certainly the case when it came to when to start raising rates, where most now agree that they come late to the party and let inflation take a stronger hold than it might have had the acted earlier.

The Fed frequently says, with some pride, that their policy decisions are dependent on data. To any thoughtful person that certainly sounds better than saying that decisions will be based on anecdotal evidence, or a finger in the wind, or anything else, but there are a couple of inherent problems with economic data.

First, the major releases that the Fed pays attention to, things like unemployment numbers, CPE and GDP growth are always out of date by the time we get them. They are for the previous month, or quarter with GDP so, in a fast-moving economy, don’t always reflect current circumstances. That is a problem exacerbated by the second issue: economic data can be volatile and the best way to smooth out that volatility is to look at multi-month or multi-quarter averages. So, in order to decide on the timing of policy changes, the Fed is looking at data that is at least three months out of date, and in some cases up to nine months behind the times!

Markets, on the other hand, tend to react to real-time information. If more immediate data and news, like weekly jobless claims, the sales numbers and forecasts of retailers, or announcements of layoffs by big companies, start to hint at weakness while the Fed is still hiking rates, stocks will be sold aggressively.

So, as sorry as I am to be the bearer of bad news, the most likely outlook for September is that it lives up to its historical reputation and will be at best a bumpy ride for investors.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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