Stocks are lower to kick off the month of September, which has historically been a weak month for equities. The ‘September Effect’ refers to the tendency for stock markets to post weaker returns compared to other months. Dating back to 1928, the S&P 500 has experienced an average decline of about 1.2% in September, making it the worst-performing month of the year on average according to RBC Wealth Management. The CME reported this underperformance has occurred roughly 55% of the time over nearly a century, highlighting a consistent pattern that investors often dread.

Interestingly, according to Investopedia, stocks have actually risen in September slightly more often than they've fallen over the past century (51% vs. 49%), but the magnitude of the declines tends to outweigh the gains, pulling the average return into negative territory. Despite this, the S&P 500 (SPX) has averaged a 4.2% drop over the last five years and fell more than 2% on average over the last ten. While historically stocks are weak in September, last year is a perfect example that it’s not set in stone, as the S&P 500 rose over 2% last year.

With stocks near record highs and elevated valuation levels, tariff concerns, and geopolitical risks present, the set-up this year may be for additional volatility. The benchmark S&P 500 is coming off four straight months of gains and the forward PE is near the 23 level, which may signal that a pull-back may be due but not required. We are already seeing the effects on asset classes this morning with Gold (/GC) hitting records highs and Oil (/CL) up near over three-week highs. The CBOE Volatility Index (VIX) is rising over 10% today near the 18 level, which may signal traders are setting up for uncertainty.

What are the reasons for historical weakness in September? Many suspect that profit-taking, a return from summer holidays, or even psychology comes into play. While September's historical weakness is well-documented, it's not a foolproof signal for investors. Markets evolve and relying on calendar anomalies like this can lead to missed opportunities.

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