It’s September, which means the news articles covering the
“September Effect” should be cropping up more frequently on financial news
sites and in reader inboxes. Prepare your mental defenses.
The main takeaway of the “September Effect” articles is almost
always the same – investors should prepare for heightened volatility and weak
returns, and perhaps even hold off on investment plans until the Santa Claus
rally takes hold in December.
But it’s all noise. Stocks do not follow a calendar, and they
never have.
Even still, “September Effect” proponents point out that
September is the only calendar month with a negative return over the last 100
years (when looking at the Dow Jones Industrial Average). Many also suggest
there are definitive causes for the declines, like traders returning from
summer vacation with ‘sell lists,’ mutual funds selling ahead of the end of the
fiscal year in September, and individual investors selling ahead of September,
which makes the “September Effect” a self-fulfilling prophecy. Again, all noise.1
If you are wondering what you should do in anticipation of a
potential market correction, we encourage you to continue to protect your
investments. Don’t make any drastic moves, but remember to stay calm and base
your decisions on fundamentals and research!
In our just-released Stock Market Outlook report, we provide
insight on how to focus on the facts and hard data. This report contains some
of our key forecasts to consider such as:
What proponents often leave out of the discussion is the
fact that terrible Septembers during the Great Depression, the 1974 bear
market, the 2001-2002 bear market, and the 2008 Global Financial Crisis are all
weighing down the average. What’s more, when you look at the S&P 500 over
the last 25 years, the September Effect loses just about all of its luster. The
average monthly return for the S&P 500 is just -0.4%, and the median
monthly return for the index is positive.
In my view, those just aren’t statistics that support overhauling your asset
allocation.
In the current year, September skeptics are pointing to the
ongoing pandemic, inflationary pressures, and the situation in Afghanistan as reasons
to avoid stocks. To be fair, I’m not saying September will surely be positive. I’m
just making an argument against the certainty that it will be negative, and
highlighting why you should not try to time the market based off market noise
like the “September Effect.” To me, the “September Effect” is not a reliable
indicator because past returns do not predict future returns, and believing
otherwise often drives investors to engage in short-term market timing – which
I strongly oppose.
I have also seen folks argue recently that the stock market
has not corrected in several months, and must therefore be due for a pullback
this fall. I do not disagree that the stock market is due for a correction in
the realm of -10% to -20%, but I do disagree with anyone who seems to know when
it will occur.
Corrections are by definition unpredictable in onset, duration,
and size. If anyone could predict them, that person would not only be wildly
famous, he/she would also likely manage everyone’s money. But such a person
does not exist. The next stock market correction may start tomorrow, one week
from now, one month, or one year from now. No one knows.
What I do know, however, is that stocks are priced based on
forward-looking fundamentals and earnings/earnings expectations, all of which
look good to me in the current environment. Total S&P 500 earnings in Q3
2021 are expected to be up +26.2% on +13.3% higher revenues, and the chart
below shows how Q3 estimates have been pushing higher since the start of the
year. It may be September, but corporations are feeling confident about the
outlook in the next few months. And that’s what I think investors should care
about most.3
Bottom Line for Investors
The “September Effect” endures as a popular stock market
pattern, but not because it is a particularly good or powerful indicator. It is
neither. It endures because investors often look for patterns to help explain
unknowns, and September’s reputation as the only negative month is seemingly
enough to give investors an edge. But past returns do not drive or predict
future returns, and what has happened historically in September bears no weight
on what may happen this September – or any future September.
No month or time of year is better for stock market
investors than any other. What really matters, in my view, is how earnings and
earnings expectations may evolve from here. And from where I sit, it’s so far,
so good.
This report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you’ll discover Zacks’ view on:
Zacks rank S&P 500 sector picks
Zacks view on equity markets
What produces 2021 optimism?
Zacks forecasts for the remainder of the year
Zacks ranks industry tables
Sell-side and buy-side consensus
And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
1 Investopedia. April 23, 2021. https://www.investopedia.com/terms/s/september-effect.asp#:~:text=What%20Is%20the%20September%20Effect,for%20the%20month%20of%20September.&text=It%20is%20generally%20believed%20that,the%20end%20of%20the%20year
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 Zacks.com. August 13, 2021. https://www.zacks.com/commentary/1781776/3-things-to-know-about-the-q2-earnings-season
4 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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