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Kristal Insights Mins Read

The September Effect – How Real Is It?


Stock market investing is a sentiment-driven process. While most investors like to believe that they bank on data and its analysis for making investment decisions, at the end of the day, it’s the net effect of the analysis on them that gives direction to their decision. Sentiments can be tricky since different investors can respond to different market conditions in a different way.

If the investors anticipate fiscal stimulation by the government or borrowing rate cuts, then they tend to buy more expecting the markets to do well. If we turn the pages of history, then we will find that every time the Federal Reserve cut borrowing rates by 25 basis points, the S&P gained 0.16% on the same day and 0.57% over a month. On the other hand, an unstable government or increase in tax rates might induce a selling spree among them. An interesting way to understand how investor sentiment has historically impacted the market is by looking at the calendar-related effects of stock markets.

Right from the great Merchants of Venice to the digital stock markets of today, trading in stocks has seen a lot of evolution over centuries. Specifically speaking, markets have always experienced seasonal increase/decrease based on the demand for specific products like the increase in demand for natural gas in winter, etc. This has led to a belief that the stock prices will perform differently during different times of the year. So, an investor might buy stocks of natural gas companies before the winter months and cash in once the prices rise. While this is a demand-driven strategy, there are some other beliefs that are purely based on the historical performance of the markets.

The Calendar Effect is one such belief where investors expect the stock markets to perform differently during specific times of the year. There are numerous calendar effects like the January effect, Sell in May and Go Away effect, September effect, October effect, etc. While most experts believe that such calendar effects are merely superstitions which tend to override an investor’s analysis of his/her investment portfolio, in this article, we will attempt to look at the September Effect specifically and analyze it methodically.

What is the September Effect?

Before we get into more details, here is what most people believe about the September Effect.

September is considered to be the worst time of the year for stock market returns. In fact, many analysts claim that over the last 90-odd years of the modern stock markets, September has offered negative average returns – worse than any other month.
According to Global Financial Data Inc., the average monthly stock returns of the S&P 500 since 1925 are as follows:

Source: Fisher Investments

As you can see in the table above, the only month with negative average returns has been September which explains the popular belief in the September Effect.

Many experts believe that in most western countries, investors come back from their vacations in September and start trading leading to increased volatility in the markets. Another explanation is that many investors try to harvest their tax losses by selling their stocks in September leading to a drop in prices. Another probable cause can be the fact that many Mutual Funds have their financial year-end in September. Also, fund managers usually tend to redeem their non-profit positions before the year ends.

The Origin of the September Effect

While the exact origin of the September Effect is not known, the first known published analysis of Calendar Effects can be traced back to 1987 in the first issue of the Journal of Economic Perspectives (Thaler, Richard H. 1987. “Anomalies: The January Effect.” Journal of Economic Perspectives, 1 (1): 197-201).

While the core economic theory suggests that stock prices follow the martingale sequence (or random variable sequence) and they should not have any systematic patterns, calendar effects like the September Effect are quite popular.

In fact, some research also suggests that even in the early thirties, investors would sift through the available stock market data and published studies to find trends and patterns in stock market prices.

Is the September Effect real?

This brings us to the question: Are calendar effects like the September Effect real? As an investor, should you be wary of investing in September due to its negative average returns? Or, should you rather focus on your current investment portfolio and not get biased by these beliefs. Let’s investigate.

An important observation that we made while investigating the September Effect was that since 1925, there have been a few really bad Septembers as shown below:


The first two (1930 and 1931) were during the Great Depression. Another thing that all these months had in common was that they were all in the heart of huge bear markets. Unlike what many investors fear, stock prices didn’t magically drop because September was here.

The funny thing about data mining is that the choice of data points plays an important role in determining the colour of the analysis.

To give you an example, if we were to take the median September returns since 1925, the number would come around 0.10%. This implies that there has been an equal number of ups and downs in September through the years.This data is easily available online.

So, the pertinent question is, why do investors believe in calendar effects? And the simple answer is that people tend to believe more in observation than pure science. So, when they see that September is the only month that has offered negative average monthly returns, it is easier to believe that it is a systematic pattern and that it might recur.

However, there is a conundrum – are calendar effects like the September effect truly an indication of market regularities or they are just an outcome of a large data-mining exercise conducted over the years? To solve this enigma, many researchers have conducted several experiments and tried to ascertain the validity of these market anomalies. While the results have been mixed, there are equal supporters and critics of calendar effects.

Humans Love Rules

Most of us love to believe that we despise rules, but the fact is that the human brain is programmed to look for rules and follow them. We evolved from our stone-age ancestors by looking for patterns to understand the unknown and finding correlations and rules.

However, it is important to remember that while finding correlations or patterns can be natural to us, we need to focus on understanding the cause leading to the correlation. So, if the markets perform poorly in September, then what is the cause? If you can determine the cause, then you have an actionable pattern that you can leverage for your benefit. If not, then it might merely be a coincidence! Hence, even if you observe that September has been offering poor average returns over the last nine decades, without a cause it is merely an interesting observation.

Does the past performance of a stock indicate its future performance? It might if the underlying causes are repeated in the future. Else, investing in a stock based on its past performance can be a counterproductive strategy.

Also, according to the Efficient Market Hypothesis (EMH), the price of an asset fully reflects all the available information and they react only to new information. This means that an investor cannot beat the market since the “new information” cannot be predicted.

What should you do in September?

Investing should be a well-planned process. Buying and selling stocks should be based on your investment plan which should include your financial goals, risk tolerance, and investment horizon. Whether you are planning to invest in the long-term or short-term, your investment decisions should be based on concrete and actionable observations and NOT sentiments.
Volatility is an inherent part of the market. Further, there are numerous reasons behind the volatility. Whether the markets will go up or down is by far unpredictable. While many researchers and analysts try their best to predict the performance of the markets, the odds are always 50-50.

Hence, we recommend that you focus on the fundamentals of investing. You must assess and analyze the assets that you are investing in. Keeping a long-term investment horizon is known to generate more stable returns and help you avoid unnecessary speculation. It is important to be realistic with your expectations from your investments so that you can keep the risks in check. The performance of the markets at certain times of the year is a good statistical observation but buying or selling stocks assuming that these effects will recur can be counterproductive.

Summing Up

The September Effect is as real as you believe it to be. All our research indicated that while September has shown an equal number of positive and negative returns, there is no cause for the same. Hence, creating an investment strategy based on this observation can be risky. Usually, investors with a strong fundamental approach to investing tend to tide over such volatility in the markets and earn good returns in the long run. Remember, patterns and correlations are subject to observation. A different data set or a different approach to analyzing the data can yield different results.

Invest wisely.



The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.


This blog article has not been reviewed by the MAS. It is prepared solely for information purposes and does not constitute an offer or solicitation for the purchase or sale of units in the funds. This does not constitute any form of investment advice and Kristal Advisors (SG) Pte Ltd does not take into account your personal investment objectives, specific investment goals, specific needs, or financial situation and makes no representation and assumes no liability to the accuracy or completeness of the information provided here. The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort offered or endorsed by Kristal Advisors (SG) Pte Ltd.

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