Market Overview

A Shaky Start To The Worst Month Of The Year For Stocks

A Shaky Start To The Worst Month Of The Year For Stocks

The S&P 500 is off to a lackluster start in the month of September, with the SPDR S&P 500 ETF Trust (NYSE: SPY) finishing the first week of the month down more than 1 percent. Long-term investors are used to the September swoon, but there’s at least one reason to be optimistic that the September sell-off will be short-lived.

By The Numbers

Since 1950, the S&P 500 has averaged a 0.47-percent decline in the month of September, the worst average return of any month of the year. Over the past two decades, only August has been a worse month for U.S. stocks. While poor September returns have moderated in recent years, the S&P 500 is still generating overall negative average returns over the past 10 years.

Infographic courtesy of LPL Research. 

The 1-percent drop to open the month certainly isn’t ideal for investors, but history has shown things can get much worse in September. The worst September on record was September 1931, during which the S&P 500 crashed a whopping 30 percent. The S&P has also endured September declines of at least 10 percent six other times, more than any other month.

Reasons For Hope

Despite the discouraging track record for the month, there are some anecdotal signs that 2018 could be the exception to the rule. Since 1950, the S&P 500 has averaged an overall September gain of 0.4 percent in years where the index begins the month trading above its 200-day moving average, as it did this year, according to LPL Financial. In other years, it has averaged a 2.7-percent decline.

The S&P 500 also has some major momentum heading into its worst month. Since 1950, when the S&P has entered September on a five-month winning streak, it has averaged a 2.3-percent gain on the month and finished September higher roughly 80 percent of the time. LPL analyst Ryan Detrick recently said the November midterm elections are another wildcard this year.

“Although the economy is still quite strong, and stocks are marking new highs, this doesn’t mean some usual September volatility is out of the question — in fact, we’d be surprised if volatility didn’t pick up given midterm years tend to see big moves in the months leading up to the November election,” he wrote.

Election Cycle Analysis

According to Oppenheimer, the second and third quarters of a midterm election year such as 2018 are typically the two worst-performing quarters of the entire U.S. election cycle since 1929. The good news: the U.S. market has historically caught fire in the fourth quarter when there's a midterm. 

“In fact, Q4 of midterm years through Q2 of pre-election years have been the best nine-month stretch of the four-year US presidential cycle since 1929,” Oppenheimer analyst Ari Wald recently said. 

The bullish momentum has historically started in the month of October, he said. 

A Word Of Caution

There’s no question September has been a drag on investors throughout the decades, but midterm election years have often been the exception. Unfortunately, past performance is not necessarily indicative of the future, and there are countless other variables impacting U.S. markets in the near-term.

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