The summer stock market rally appears to have fizzled out after steep declines in August, and experts warn investors should expect more volatility in September, which is historically the market’s worst month—especially when stocks are already down for the year.
Stocks struggled to kick off September on a positive note Thursday, moving lower since last week as investors worry about tighter monetary policy, with the Federal Reserve expected to aggressively keep hiking interest rates well into next year.
After steep declines in August—with all three major indexes losing over 4%, experts are now warning of further losses ahead, given that September is historically a terrible month for markets.
“Although August is never a month to get excited about, as most investors know, September has historically been even worse,” with a median decline of 0.42% for the S&P 500 dating back to 1928, according to a note from Bespoke Investment Group.
This could be an especially “tough month” given the combination of “peak hawkishness from the Fed and the frustratingly slow pace at which inflation is cooling,” predicts Jeffrey Buchbinder, chief equity strategist for LPL Financial.
What’s more, the negative seasonal effects of September as the market’s worst month are “exacerbated” when the index is already down for the year, according to Bespoke.
On years that the market is down through the end of August, the S&P 500 has averaged a decline of 3.4% in September, but when the index was up for the year heading into September, it would end up flat for the month, according to the firm.
What To Watch For:
“Investors may naturally seek a recovery after a weak August, but history suggests that year-to-date weakness begets weakness in September,” according to Bespoke. Looking ahead to the rest of the year, historical data suggests that the stock market could continue to have a rough time. When the S&P 500 was down heading into September, the index averaged a loss of 1.2% in the rest of the year, compared to a 3.3% gain when coming into September with gains, according to the firm’s data.
“It seems most of Wall Street believes September will be a month we won’t want to remember,” with only several weeks to go before a “pivotal” inflation report and the Federal Reserve’s next policy meeting, notes Edward Moya, senior market analyst at Oanda. The latest batches of U.S. economic data, including a stronger than expected jobs report, have all confirmed the Fed’s hawkish stance—with the central bank likely to remain aggressive with rate hikes, he adds. “If the economy remains resilient over the next few months,” investors are likely to believe the Fed “won’t be done tightening at the end of year.”
Stocks rebounded somewhat this summer in what many experts labeled as a “textbook” bear market rally. Following a brutal selloff in the first half of 2022, the S&P 500 fell into a bear market and hit a low point in mid-June, down as much as 23% for the year. The benchmark index rallied as much as 17% from the June low point amid hopes that inflation may have finally peaked, though that optimism has since faded especially after last week’s Jackson Hole symposium, where Powell reiterated an aggressive monetary tightening plan.