Warning: September is historically a dismal month for equities

The Dow Jones and S&P 500 fell sharply in September last year and in 2020, although the broader market rallied in both years.

August is about to end, which means summer is almost over in the northern hemisphere. (Fun in the sun, Australia!) If that’s not enough to bother you, then it could: September, which starts on Thursday, is historically the worst month of the year for the stock market.

The Dow Jones and S&P 500 fell sharply in September last year and in 2020, although the broader market rallied in both years. That doesn’t mean equities are doomed to end September in the red, of course. Stocks rallied in each of the three September months preceding the pandemic.

But here’s another potentially ominous sign: it’s a midterm election year. The Dow Jones has fallen in 11 of the last 18 pre-midterm Septembers since 1950, according to data from The Stock Trader’s Almanac.

So don’t rely on past performance to dictate future results. Ultimately, investors should focus on fundamentals rather than calendar dates. Earnings, the economy and the Federal Reserve’s interest rate policy will matter far more to stock performance than this month.

Still, there are reasons to be nervous.

The next Fed meeting on rate hikes is September 21. Several key economic reports are under review that will give investors more clues about the health of the labor market and whether inflationary pressures are easing. Congress will be back in session right after Labor Day as well.

“There is no doubt that there are a number of geopolitical concerns and economic data that could lead to volatility. Investors should be prepared for that,” said Wilshire Chief Investment Officer Josh Emanuel.

Traders should watch the Fed and the economy closely, he added, and the good news is that there are signs that the labor market remains healthy and inflation is finally starting to subside.

If this trend persists, Emanuel said, “a soft landing could be a plausible scenario,” meaning the Fed won’t cause a recession by raising rates too aggressively.

The stock market had a miserable first half, which could mean that the recent rebound (July’s strong rally and a flat, albeit choppy August) could continue.

“Historical concerns about September and October are less relevant this year. There are forces at play that are more significant,” said Alex Chaloff, co-head of investment strategy at Bernstein Private Wealth Management. “There are a number of potential catalysts for a fall rally.”

Chaloff said if the slowdown in inflation continues, “the market will significantly encourage it” and the Fed may be more likely to raise interest rates next month by just half a percentage point. instead of three quarter points. That could be “key to building momentum for a rally,” Chaloff added.

Chaloff also thinks a soft landing is possible for the economy, or in the worst case, a “mild recession”. Investors need not worry about a sharp economic slowdown because “the strength of consumer and business spending will be more than enough to get us through the crisis,” he said.

So, as long as the economy continues to improve and inflation fears spread further in the rearview mirror, the market could well avoid a big slump in September.

Or an October crash. Don’t get us started on 1929. Or 1987. Or 2008…

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