September, the black month for the stock markets that threatens historical highs

Wake me up when September endsThe well-known theme song by the rock band Green Day could be the sentiment that grips many investors at the end of summer. Statistically, September is the worst month on the stock market for the main US indices. And after an August in which the markets exceeded or approached their historical highs, uncertainty over monetary policy, macroeconomic data and increased volatility threaten to test investors’ nerves during this month.

“August started in a tumultuous manner with a significant drop in Japanese stocks, the worst since 1987, and record volatility in global markets. Despite this choppy start, the month ended with US stocks near all-time highs. However, September, historically the worst month for the S&P 500, is expected to present challenges. Although the buy-and-hold strategy continues to prove to be the most solid in the long term, investors should be on the lookout for possible corrections,” says Javier Molina, analyst at eToro.

In the last 25 years, the S&P 500, which includes the largest listed companies in the country, has recorded a negative balance in September on 15 occasions. Unforeseen events such as the attack on the Twin Towers in 2001 or the bankruptcy of Lehman Brothers in 2008 occurred in September and had their important aftershock on the Stock Market, fueling the cursed legend of this month for the markets. But beyond specific events, experts have also tried to explain the bearish sentiment that takes hold of the Stock Markets in September.

On the one hand, analysts point out that managers, after returning to the office after the summer, take advantage of September to rebalance their portfolios, so they execute a greater volume of sales that put pressure on stocks. Likewise, companies, with an eye on closing the year in positive territory, can get rid of some investments to generate extra profits. Some of the justifications to explain this effect are based on the fact that in September debt purchases usually pick up, attracting capital that otherwise would have gone to stocks. Other experts also point out that large investment funds close their fiscal year in October and close short positions.

In any case, the mantra that managers always repeat is that past results do not guarantee future results. And beyond a trend or a kind of curse on this month of the year, there are real factors that worry investors and that could turn September into a disastrous month again: the increase in volatility and macroeconomic data.

“The main issue is that underlying economic and monetary conditions can have a very important influence,” explains Citi. This Tuesday the markets already experienced a day of nerves on edge and the main European, American and Asian indices closed in the red. Analysts had already warned that the volatility experienced in the first days of August was here to stay and that it should not be strange for the stock markets to suffer similar episodes in the future. In this sense, the VIX, which is the index that measures market expectations regarding future volatility, has rebounded in September by 30%. If in August it closed at 14.85 points, since the first days of September it has remained above 20 points.

On the other hand, the market is on edge ahead of the publication of US employment data this Friday. Last month, weak figures already tested investors’ nerves, causing multimillion-dollar losses in the main indices around the world due to fears that the US economy would enter a recession. Although the situation was finally brought under control, and the stock markets recovered their historical highs, the market is preparing for another shock if the data is disappointing.

“US equities remain highly dependent on macro data. We believe that employment data, whether it suggests a slowdown or paves the way for a soft landing, will continue to determine the level of volatility,” UBS analysts explain in a report. They also add that although markets have continued to rise, they have already detected a rotation towards defensive positions by investors.

The market is waiting to see what path the Federal Reserve is expected to take in cutting rates on the 18th. Analysts are no longer asking whether the central bank will cut rates, but rather how much. In August, with the stock markets infected by fear, there was even speculation about an emergency intervention by the Fed to calm the mood among investors. The objective is to reduce interest rates enough to avoid causing a slowdown in the economy that would lead to a crisis, but not so much that inflation picks up again.

There are also other sources of uncertainty, such as concern about the constant geopolitical tension in the Middle East and the possibility that it could lead to a conflict between the main oil producers. There is also the US presidential election process. In fact, beyond the negative balance that September has had for the stock markets, experts also point out that usually in the years of presidential elections in the United States, this is usually more benevolent for the markets.

In any case, in the last quarter of a century, in none of the years in which elections were held, the S&P was able to close the month of September in positive territory (in 2020, in the midst of the pandemic, it fell by 2.1%; in 2016 it lost 0.75%, in 2012 5.36%, in 2004 1.04% and in 2000 5.04%).

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