September – The Worst Month for Stocks

Stocks were extremely volatile in August as the market got whipsawed by various developments throughout the month. The S&P gained or lost over 1% in 11 of the 21 trading days during the month and in the end, the index dropped 1.8% on the month.

Now we enter September with investors nervous and the ninth month is historically the worst month for stocks. The average performance over the years has been a loss of 1% during the month. The index has bucked the trend for the last couple of years by gaining 0.4% during September 2018 and 1.9% in September 2017.

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As we enter September 2019, we still have a number of storylines that could impact the results. The trade war doesn’t look to be going anywhere as new tariffs went in to effect on September 1. This has been the biggest determinant in terms of the whipsaw action over the last few months. When President Trump tweets bad news on the trade front, the market goes down sharply. When he tweets good news about trade the market jumps.

There is also the matter of the inverted yield curve that also seems to be a concern for investors. When the 2-year treasury yield moved above the 10-year, it triggered some selling in stocks, but that seemed like a knee-jerk reaction. Yes, the inverted yield curve does have a history of preceding a recession, but the recession usually occurs one to two years after the inversion. Selling stocks today because we could have a recession in 2020 is ridiculous.

To me, the more immediate concern is the amount of sovereign debt being issued with negative interest yields. I still can’t wrap my head around the idea of investing in something that is going to create a negative return. This suggests that investors don’t see better opportunities elsewhere, at least not from a risk/reward standpoint.

Of course, as a contrarian, I like seeing that investors are cautious because it means they are taking action to move money out of stocks and into other asset classes. When the majority of investors are cautious, it is usually a good time to buy and when investors are euphoric, that is when you want to be cautious.

The AAII Sentiment survey from last week showed 26.1% of investors were bullish, 31.7% were neutral, and 42.2% were bearish. The historical average for the bearish percentage is 30.5% and the historical bullish percentage is 38.5%.

Another sign of how cautious investors have become, $42 billion was pulled out of mutual funds and exchange-traded funds during the month of August. That is one of the largest monthly outflows in the last few years.

All in all, seeing pessimism or bearish sentiment on the rise is a good thing. In addition to the fund outflows and the AAII sentiment survey, there were other surveys that were showing low readings and levels seen after pullbacks. This could be setting the market up for a better than average performance during the month of September.

There was a recent article from Investor’s Business Daily that I found particularly interesting. It pointed out some of the same things I have pointed out, but it also pointed out some areas that have outperformed the overall market. The industrial sector gained 0.1% during the last five Septembers and that is using the Industrial Select Sector SPDR as a barometer for the sector. More specifically transportation stocks have performed well in the month of September.

Overall I think investors do need to be cautious. We are in one of the longest economic expansions in history and we know it has to come to an end at some point. There are still a number of geopolitical issues that could disrupt the markets and send stocks lower. However, I do think there are opportunities where the risk/reward relationship is worth exploring.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.


  1. One question about the way that you wrote the sentence, “the two year treasury yield moved above the 10 year…”. Is it not more accurate to say that the 10yr dropped below the 2yr? The 10yr was moving down while the 2yr was staying relatively stable is the way I see it, since the Federal Reserve is cutting its interest rates. Both rates are very low and dropping.

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