August was bad for stocks but September could be worse

If you’re still catching your breath from the stock market’s characteristically wild swings in August, buckle up: September could be even bumpier.

Over the past 50 years, September has been the worst month for stocks, posting an average decline of 0.92%, according to Bespoke Investment Group.

August was no picnic, living up to its reputation as the worst month for the market over the past decade. Even after the past week’s rebound, the Standard & Poor’s 500 index fell 1.8% last month, more than the average 0.78% August decline from 2009 to 2018, according to LPL Financial. The broad index is still up 16.8% for the year but it’s 3.3% off its July 26 high. And the Dow Jones industrial average is 3.4% below its closing high of 27,359 July 15.

“August was a burst of volatility for most investors, and we expect that to continue in September,” says Ryan Detrick, senior market strategist for LPL Financial.

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August is historically a troublesome month because many investors are on vacation and trading is light. So when Wall Street pros sell stocks, there are fewer buyers around to put the brakes on a sell-off, which can be accentuated by worrisome news.

That scenario that played out when President Trump tweeted in early August that he would impose a new round of tariffs on Chinese imports starting September 1, and then tweeted on August 23 that he would bump those duties even higher. Sandwiched between the tweets were mounting worries about a slowing global economy and bond yields that roiled markets.

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September poses its own challenges. Mutual fund managers and other financial professionals typically start selling underperforming stocks in the third quarter, largely in September, as they begin to bolster their returns for the year, says Christopher Mistal, research director of the Stock Trader’s Almanac. That pushes down overall share prices. September also has witnessed its share of negative news events such as the 2001 terrorist attacks and the 2008 Lehman Brothers bankruptcy, he says.

But markets typically don’t trace a straight line downward in September. Stocks generally move higher the first three weeks a month as vacationing traders return to the office and take advantage of the buying opportunities created by August’s price declines. Yet several stock and futures options expire the third Friday of the month, forcing financial managers to make decisions that often lead to a selling wave the final week of the month, Mistal says.

“A lot of managers who have a terrible position get rid of it… at that time of the month,” he says.

And in case you’re wondering, a down August doesn’t appear to help or hurt Septembers performance, according to an analysis by Stock Trader’s almanac.

On the bright side, over the past decade, the S&P 500 index has actually performed pretty well in September, turning in an average gain of 0.9%, Detrick says. That puts it in the middle of the pack among all the months of the year, according to LPL. Mistal says low interest rates since the end of the Great Recession in 2009 generally have fueled the record 10-year-old bull market and September has benefited from those gains.

Stocks also tend to do well the year before a presidential election, he says, as presidents roll out initiatives to improve their reelection chances.

At the same time, the market is especially vulnerable to trade war and interest rate developments this year. Any negative news is likely to have an outsize effect on stocks this month, when many fund managers are likely to be in a selling mood, Mistal says. For example, markets are expecting the Federal Reserve to lower its key interest rate again at a mid-September meeting but could be disappointed by a quarter-point, rather than a half-point, cut.

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Here’s the good news: Whatever happens in September, a bull market often maintains its momentum. When the S&P 500 is up through July, as it was this year, it averages a 4% gain the rest of the year, according to Bespoke.

“History shows stocks have overcome the volatility,” Detrick says.