It doesn’t mean September is the worst performance in a given year, just that it’s a rare global anomaly each year.
What causes the “September Effect?”
There are many theories as to what causes the effect. A few possibilities according to Investopedia:
- Seasonal behavior changes. Many investors change their portfolios as summer ends to “cash in”.
- Mutual funds selling investments at a loss to reduce tax liabilities.
- Investors may vacation during the summer months and overall trading volume is low. Upon return from vacations, investors may sell off positions they’d planned to sell. The influx of trades as summer winds down would lead to increased selling pressure and an overall decline.
- The fiscal year for mutual funds ends in September. In anticipation, many fund managers sell low performing positions.
2020 has been anything but typical. Will we see the September effect this year?
In a recent article, Seeking Alpha points out that while the phenomena is largely folklore or happenstance, 2020 could see it come to fruition.
Thus far, it seems that September may be on track to fit the norm largely due to a stock market bubble as stocks remain expensive despite the pandemic’s impact on the economy.