Stock Market Crash Alert: Brace Yourself for the September Effect

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Wall Street is abuzz over the “September Effect” and what it may mean for a potential stock market crash. What exactly is the September Effect?

Well, the September Effect refers to the historical trend of September being far and away the worst month for stocks. Indeed, “an investment of $1,000 invested only in the month of September going back to 1960 would be down 40% to $600 by 2022.” For comparison, under the same conditions, November and December would each be at more than $2,000 while October would be in the green at $1,785, according to Yahoo Finance.

So, September is a clear outlier in this regard. However, there’s some evidence that it’s relative poor performance is also a product of outliers. Indeed, Black Monday, 9/11 and the failure of Lehman Brothers ahead of the global financial crisis in 2008 all occurred between September and October, each resulting in substantial selloffs in equities. Those outliers aside, September would actually have positive returns overall, while October’s gains would be even more comparable to November and December.

In fact, this year’s stock market conditions are unlikely to give way to an impending crash in the latter months of 2023. In comparable years — that is, years in which the market recorded big gains by July and experienced a pullback in August — stocks typically resume their upward climb in the final third of the year.

Per data from Yahoo Finance, there are 11 years that fall under similar conditions, each of which recorded net gains between September and December. Perhaps expectedly, December is historically the strongest of the back-four months, recording an average 2.5% gain in comparable years and trending in the green 91% of the time.

Stock Market Crash Fears Elevated in Post Labor Day Trading

While it’s likely too early to make any definitive projections regarding the turn of the stock market heading further into September, early signals show traders are, at the very least, a bit on edge. Indeed, equity markets opened in the red across the board Tuesday, the first day of trade after Labor Day.

With the Federal Reserve still putting on a hawkish face ahead of its Sept. 19 to Sept. 20 meeting, there are still reasons to be tentative about the state of the economy and, by extension, the stock market. Predictions are still up in the air on whether the Fed will raise rates again this month — the would-be 12th rate hike since the central bank first raised rates this cycle.

Whether the Fed moves forward with another hike this year remains a point of contention among economists. Some believe the central bank should take its foot off the gas for the moment and allow time for its previous rounds of rate hikes to fully sink in. Others, like Fed Chair Jerome Powell, have hinted that the economy’s resilience to previous hikes may require higher lending rates.

At the annual Jackson Hole Economic Policy Symposium last week, Powell suggested that the Fed still has its finger on the trigger:

“We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

Further rate hikes are an undeniable bearish indicator for stocks. Heading into an already dubious fall season, the notion of an increasingly hawkish Fed clearly puts investors in a tricky spot. Whether that manifests into a year-end stock market crash remains to be seen.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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