September Effect

September is here and risks are rising for stocks


September is set to live up to its reputation as the worst month of the year for the stock market, as strategists say stocks face plenty of potential risks. Since 1950, the Dow Jones Industrial Average (DJIA) has averaged a decline of 0.8%, the S&P 500 has averaged a 0.5% decline during September while the Nasdaq which was first established in 1971 has fallen an average of 0.5% during September trading.

Charles Schwab chief investment strategist Liz Ann Sonders told CNBC on Wednesday (Sept.1) it’s too simplistic to assume the market will follow history. “Are there a myriad of risks out there that at some point in time could be a risk factor that could lead to more than a 3% or 4% pullback? Absolutely,” she said. “Could it be in September? Sure.”

Lindsey Bell, chief investment strategist at Ally Invest, told Fortune last month: “I think we’re going to get that volatility that’s historically expected in the month of August and into September.” She added: “I think the remainder of the third quarter could be a little bit rocky.”

And in July, strategists at Morgan Stanley recommended that investors took a more defensive approach, hedging themselves against further equity market declines.

What are the mounting risks that make this September a potentially hazardous time for stocks?

Risks in September include economic data out of the U.S., the world’s largest economy. The upcoming official August U.S. non-farm payrolls data is slated for release

on Friday (Sept.2) and could determine how much the Federal Reserve will tip its hand at its Sept. 22 meeting on plans to reduce its pandemic-era stimulus support this year.

Investors already digested on Tuesday (Sep.1) a disappointing employment report
released by payroll processor ADP. The precursor to the official August U.S. non-farm payrolls data, showed that U.S. companies created far fewer jobs than expected last month with private payrolls rising just 374,000. That is well below the Dow Jones estimate of 600,000.

Inflation data is next. The consumer price index will be out on Sept. 14 and if data continues to run hot, that could push up Treasury yields, a negative for the market, according to Julian Emanuel, Managing Director, Chief Equity and Derivatives Strategist at BTIG.

Emanuel also said the U.S. withdraw from Afghanistan hangs over the market as a risk factor. “The event has come and gone and the political fallout could be longer lasting, particularly if there are signs for greater instability in the region,” he told CNCB.

UN Secretary-General Antonio Guterres called on countries to provide rapid aid, noting that almost half of the Afghan population — 18 million people — need assistance to survive.

The withdrawal may prove to be a bigger problem for Europe than for the U.S. with politicians concerned about an influx of migrants to the Old Continent.

The market is also keeping an eye out on the $1.2 trillion infrastructure bill, expected to be considered by Congress in September. After rounds of negotiations, the Senate had passed the landmark bill with bipartisan support.

Remember, the September Effect doesn’t only affect U.S. markets, it is a worldwide phenomenon. But at least we all have the fourth quarter to look forward to.