Is September the Worst Month for the Stock Market?
Is September the worst month for the US stock market? Depending on who you ask, maybe. This belief is so common that it has a name: the “September effect.”
In this post, we’ll look at nearly a century of US stock market data to investigate whether there’s any truth to the idea that September is a bad month for investment returns. We’ll also look for patterns in both weekly and daily returns since 1926, and explain what our findings mean for you as an investor.
September has the worst returns on average
It’s true: September is the worst month for US stock market returns on average. We analyzed US stock market performance as far back as 1926 and found that the average return for September has been -0.85%. Over the same time period, every other month has had positive average returns.
The chart below plots the average total returns of the US stock market from July 1926 through May 2024.
Does this mean investors should sell their positions in US stocks in August and buy again in October? We don’t think so.
First of all, past performance doesn’t guarantee future results. In hindsight, sitting out every September over the last 98 years would have paid off, at least on a pre-tax basis. But that doesn’t mean the trend will continue into the future.
Second, US stock returns are noisy and variable. The average monthly return in our analysis is just under 1% (0.95% to be exact), but there is a huge amount of variation around that average. About 64% of monthly returns since 1926 are below -1% or higher than 3%, and there are some months with very large-magnitude values (both positive and negative).
And finally, keep in mind that investment gains are taxed at different rates depending on how long you hold the investment before selling. If you hold an investment for at least a year before selling, any profits you earn can be treated as long-term capital gains instead of short-term capital gains. Long-term capital gains are taxed at a maximum rate of 20% at the federal level, whereas short-term capital gains are taxed at a maximum federal rate of 37% in 2024. If you sell your investments every August and buy them again in October, any potential profits you earn will be treated as short-term capital gains, and are likely to be taxed at a higher rate.
The worst weeks for the US stock market
We decided to dig in more and look at individual weeks instead of just monthly returns. To do this, we calculated the average return of each week of the year (with each week starting on a Monday and ending on a Friday). We found that since 1926, most weeks have had a positive return on average, but not all: 12 weeks out of the year (about 23%) have averaged negative returns. The week with the worst return on average, week 38, falls during September.
Does this mean that going forward, we think you should sell on the Friday before each one of the weeks with negative average returns and buy the Monday after? Again, the answer is no for the same three reasons we gave above.
The worst day for the US stock market
We can go one step further in granularity and calculate the average return for each day of the year. The majority of days have a positive average, but not nearly all—about 37% of the days have had negative returns on average since 1926. You might be surprised to learn that the worst day on average for the US stock market is not in September—it’s actually October 19, with an average daily return of -0.39%. This is partially due to October 19, 1987, which is known as “Black Monday”—the single worst day for the US stock market in the period we analyzed. The second-worst day on average, however, is September 26, with an average daily return of -0.32%.
Of course, a strategy that only invests on days with positive historical average returns is even more absurd (not to mention time-consuming to execute) than the weekly or monthly strategies above. We don’t recommend doing this.
Why we think you should ignore the “September effect”
The patterns described in this post might be interesting, but we don’t think they should inform your strategy as an investor (keep in mind that we only looked at these patterns over one time frame, too). Stocks compensate investors for taking risk. The expected return from investing in stocks is positive over the long term, but over any given short-term period, the return may be negative. The same can be true looking at averages over the same period of time each year, whether that period is a day, a week, or even a month. News outlets that want to get your attention may write stories about the “September effect,” but we largely ignore them—and we think you should, too.
Instead, we suggest that you focus on what you can control: diversifying your portfolio, lowering your taxes, and minimizing your fees. At Wealthfront, we make this easy: our Automated Investing Account is tailored to your risk tolerance, designed to maximize your after-tax returns, and available for our low 0.25% advisory fee. You can also take advantage of a strategy known as “dollar cost averaging” where you invest a set amount of money on a regular schedule (for example, you might invest $1,000 every month) regardless of whether the market is up or down. As we explained in a blog post earlier this year, dollar cost averaging can help investors to make money even when the market doesn’t go up.