The September Effect

In September 2023, the S&P 500 index experienced its most significant monthly decline of the year, slumping by approximately 4.87%. This downturn was primarily attributed to the Federal Reserve's monetary policy decisions and statements. The central bank surprised markets with a more hawkish stance on interest rates, causing concerns about rates being higher for longer. Chairman Jerome Powell's remarks that a soft economic landing was not guaranteed further exacerbated the negative sentiment.

The surge in crude oil prices, mixed economic data, a prolonged pullback in technology stocks, a significant strike by the United Auto Workers against major carmakers, and the looming threat of a government shutdown (which was thankfully averted) didn’t exactly contribute any positive sentiment either. Additionally, the 10-year U.S. Treasury yield rose above 4.5%, putting pressure on market valuations and further impacting investor confidence.

Before the September decline, the S&P 500 experienced a robust rally in the first half of 2023. But investors are now closely monitoring the possibility of achieving a "soft landing," where inflation is curbed through a controlled slowdown in economic growth without entering a deep recession.

In terms of sector performance, all eleven S&P 500 sectors ended the month in negative territory, except for the Energy sector. Real Estate suffered the most, with a substantial decline of nearly 8%, followed closely by the Technology sector, which fell by about 7%.

Going back more than a century, the month of September has been — on average — the worst month for the stock market. And 2023 appears to be no exception. But a long-term investor would recognize that the ‘September Effect’ is nothing but an anomaly. Market volatility is not a byproduct of the calendar month. Fluctuations in the stock market and monthly declines, even significant ones, are all part of the natural ebb and flow of financial markets. And part of your financial plan as well. This is why we stress proper risk tolerance and goals-based planning.

The challenges in September are excellent buying opportunities. The market's decline and sector performances, particularly in technology, may present good entry points for fundamentally sound investments. In the words of Vanguard founder John Bogle: “the stock market is a giant distraction to the business of investing”.

Next, we’ll have to deal with the ‘October Effect’. Just remember this: staying focused on the overall financial plan remains the priority. Whatever happens in October and through the rest of the year, don’t be swayed by short term fluctuations, just stick to the plan.

Photo by Blessing Ri on Unsplash