All things considered, I think it's safe to say nearly everyone is surprised by the relatively fast rebound of the stock market. Aside form a few dips here and there, the steep decline that began in February has been erased as the market crawled back to all-time highs.
Let's look at how the S&P 500 Index has performed:
On February 2nd the S&P was up 4.81%...and then reality began to set in
By March 23rd the index was down 30.75%
After that, the market was volatile, but the direction was mostly up
By September 2nd the index had regained all it had lost and up 10.84% YTD
Since the 2nd, we've experienced declines and what I can only describe as an uncertain market
As of September 16th the S&P 500 is up 5.53% YTD
On July 31st I gave you seven reasons why financial markets recovered while the economy continues to struggle. The same reasons still apply, but based on the decline at the beginning of this month I'm going to add another reason to the list: The September Effect.
History Repeats Itself (Sometimes)
Historically, September is the month when the stock market's three leading indices, the Dow, the S&P 500, and the NASDAQ, usually perform the worst. There's even a name for this anomaly: the September Effect.
Market volatility or losses aren't guaranteed in September, but they occur with enough regularity that the phenomenon was noted in a research paper in 2013. If you're interested, and I'm sure you are, here's a link to Stock Market Performance: High and Low Months by Vichet Sum.
When looking at monthly returns in 70 countries over decades, September was the worst month measured by median return.
Causes of the September Effect
I don't know why financial markets sometimes decline during the month of September, but I did some research and found some theories:
Seasonal behavior bias. With fall approaching, investors decide to change their portfolios. I guess this is kind of like putting away your summer clothes in favor of more weather-appropriate gear.
Attention. Investors, returning from summer vacation, are finally ready to focus attention on their investment portfolios. This may translate to selling positions that have performed well over the past year. Of course the same investors could just as easily buy stocks in September, driving up demand and share prices.
Mutual funds selling large positions. Many mutual funds have their fiscal years end in September. During this time the funds may sell positions at a loss in order to reduce the size of their capital gain distributions.
One of the mysteries of life. This is what I used to tell my daughters whenever they asked a question I couldn't answer.
Out of all the theories listed above I like #4 the most. It also happens to be the explanation I came up with on my own. None of the other options seem like they would play a significant role in the anomaly.
So what should you do? You probably know what comes next, but I'll repeat myself:
Focus on the things you can control.
Stick to your financial plan.
Wear a mask.
Wash your hands.
Get some exercise. Yes, every day.
Get a flu shot.
Limit your social media intake.
