Why Stocks Fall in September

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Thanks to two major crashes, October usually is pegged as the worst month for stocks - but that's not the case.

It's actually the current month that has delivered the worst performance, leading to the question: Why do stocks fall in September?

Going back to 1929, the S&P 500 averages a 1.1% decline in September. It's the only month to drop more than 50% of the time, according to Standard & Poor's research. All other months have positive returns 60% of the time.

Stock Market in September

September performance for the Dow Jones Industrial Average is also dismal.

The Dow has lost an average 1.09% in September since the index started in 1896. That compares to the 0.75% gain in all other months.

So what is behind September's bad showing for the stock market?

Markets in September

Why September Is Bad for Stocks

Here are five reasons why stocks tend to fall in September:

  • In September, moods change as people again focus on portfolios instead of vacations. Investors are more inclined than in the previous summer months to take action and dump losers. "Psychologically, when the leaves turn in the fall, vacations end and the days are getting shorter, there is this kind of negative vibe out there that tends to accentuate any negative events," Dan Seiver, a finance professor at San Diego University, explained to the Associated Press.
  • Tax refunds and bonuses are received in the first few months and often go into IRA accounts or toward maxing 401(k) contributions, so less capital flows into investments in the second half of the year.
  • Mutual funds frequently do some "window dressing." Scores of funds end their fiscal year in September, and they sell their losers and buy the best-performing stocks ahead of presenting their year-end portfolios and fund performances to shareholders.
  • Investors often do a reality check in September. Record stock market rallies have pushed the Dow up some 14.55%, the S&P 500 up 16.64%, and the Nasdaq up 23.74% year to date. Investors want to take a piece of the robust gains before volatility hits.

Will This September Be Bad for Stocks?

Even without the historical trend, there are factors pointing to increased volatility this month, like these four developments:

  • Geopolitical risks in Syria and Egypt remain a threat. That means the following: crude oil prices are expected to move sharply higher (higher oil prices leave consumers with less disposable income), and money is shifting from equities into safe-haven assets like gold and silver.
  • The Bank of Japan releases its interest rate decision on Sept. 5. Its benchmark interest rate was last recorded at 0%. The zero interest rate policy is part of a controversial move from Japan's government aimed at expanding the Asian nation's economy and end nearly two decades of deflation. From 1972 until 2013, the rate average was 3.22%. Any rate change from the world's third-largest economy could rattle global markets.
  • The Federal Open Market Committee (FOMC) meets Sept. 17-18, and the big question on everyone's minds is will the central bank taper or not taper its $85 billion monthly bond-buying program. Minutes from the U.S. Federal Reserve's July meeting showed broad support for a scaling back, but a spate of weak economic data may give the Fed reason to pause. Ever since the first mention of a taper, stocks have sold off. Even if the Fed keeps the same course for now, fear of a QE taper could slam stocks before the meeting.
  • We find out who will become Germany's next chancellor on Sept. 18. Analysts expect a victory for Angela Merkel and her ruling collation in September general elections. But there are some who would like to see more active engagement from the country and for the leading Eurozone nation to take on more global responsibility, which Chancellor Merkel has steered clear of. The latest polls have Merkel ahead by 41%. In order to garner the majority of votes, Merkel may have to take a tougher line on banks, push up spending, and raise taxes on high earners - moves that could rattle markets.

As investors, you should be prepared for a busy month. But no matter what happens to stocks, we have you covered with the info you need now.

Here are a couple of stories (in case you missed them the first time) that will prepare you for what's ahead:

  • With all the "crash talk" floating around markets, there's really only one indicator you should take seriously. Fitz-Gerald spells it out for investors - with four things to do now - in this analysis, "The Only "Crash Talk" Worth Trading."

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