What is the September Effect?

The September effect is a market anomaly where traditionally, stock markets underperform, and share prices end up lower on average.

 

Excluding the New Year period, September is by far linked to the biggest number of clichés when it comes to resolutions: September is a time for a change, September is the best time to start a new routine, to buy a car, to get a gym membership.

 

It probably has something to do with the after-holiday psychology. Once we charge our batteries and clear our heads, we feel ready to move forward. Yet, September is also linked to high costs, such as schooling and that gym membership we mentioned earlier. It also means less free time as we are trying to put our decisions into effect. 

 

All the above are considered to create the so-called ‘September Effect’ in markets. However, the September Effect is more of a pattern than it is a phenomenon. 

 

Market analysts have observed that the stock market’s three leading indices (S&P 500, Dow Jones Industrial Average (DJIA) and Nasdaq Composite) typically perform poorest during September. What’s more, data analysis has shown that global share prices have fallen in more than half of the last Septembers.   

 

However, many traders question whether the September effect is real or just an urban financial legend. As with many other calendar effects (any market anomaly or seasonal behaviours), the causal relationship is difficult to verify. 

What is the September Effect?

“Remember, remember the effects of September”

The September Effect is associated with equity markets worldwide, while analysts attribute it to seasonal behavioural bias. 

 

For many people, September usually means a smaller budget (those £15 Tiki cocktails on your summer holiday may or may not be responsible for burning a hole in your pocket). However, the effect is felt not only with smaller budget traders but big funds too.

 

For example, investors often switch up their portfolios at the end of summer to cash in. During the summer months, the traded volumes are thinner as many investors usually refrain from actively trading. Once they return to work, they return to trading. As a result, the market experiences increased selling pressure and, therefore, an overall decline.

 

Also, many mutual funds cash in their holdings to harvest tax losses as they experience their fiscal year-end in September. Interestingly, there appears to be no particular market events or news contributing to this market anomaly.  

 

Since their establishment, the DJIA has declined by 0.8% on average in Septembers, the S&P 500 by 0.5%, and the Nasdaq also by 0.5%.

 

As it doesn’t happen every single year, the September Effect must not be used to predict the market movement. Besides, traders should focus on more than just seasonal patterns to make predictions and test their strategies. 

 

However, traders might find the September Effect an exciting opportunity to watch the S&P 500, Nasdaq 100 and DJIA. Our guide, Indices trading, explained, is the perfect starting point to get started with the market. 

Disclaimer: Eurotrader doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information provided here, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. We advise any readers of this content to seek their own advice.

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