Wednesday 4 September 2019 9:06 am Markets Talk

August was awful for stocks, but September could be worse

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Trade tensions caused havoc for global stocks, making August only the second month of 2019 where the market closed lower. But September traditions could mean that more pain is still to come. 

Traditionally, September is a bad month for stocks. Starting in 1937, the S&P 500 and Dow have closed the month 1 per cent lower on average each year. Since its inception in 1971, the Nasdaq has lost an average of 0.5 per cent during the month. September is the only month worse than August for stocks – which is worrying considering how bad the August just gone was. 

The latest major selloff began at the end of July, and August began with the Dow hitting a two-month low of 25,077 and the S&P 500 falling to test 2,780. Both indices are now around 4.5 per cent higher after a turbulent few weeks, but they still closed August well below opening levels (opening levels that were in the middle of a nosedive). The Dow, SPX, and Nasdaq all saw the worst August performance since 2015. 

Both the Dow and the S&P 500 are currently sitting around the 50% Fibonacci retracement levels of the July-August bottom-to-top move. But increasing fears over trade suggest pressure remains to the downside. 

What causes the ‘September Effect’? 

There are many theories about why stocks perform worse in September. Many mutual funds end their financial year this month, and fund managers close losing positions before the year ends. Mutual funds could also be looking to harvest tax losses. 

Other theories suggest that many traders are on vacation over the summer, and return to work in September and exit positions they had been considering selling. 

Regardless of what causes it, there is evidence to suggest that the ‘September Effect’ is lessening. In the last couple of decades the scale of the average decline has shrunk, with the Dow losing 0.8 per cent compared to the longer-term average of 1 per cent and the SPX down 0.5 per cent. 

One theory for this is that investors, aware of the pain coming in September, adjust their portfolios accordingly in August. Although with everything else going on in August, it’d be hard to tell from looking at the charts whether this was the case. 

Regardless of the tradition, the recent escalation of tensions between the US and China, and worsening global economic conditions, means the risks for equities remain skewed to the downside – unless the Federal Reserve comes to the rescue with another rate cut.