Stocks are poised for first September gain in 5 years. Here's why more good times could lie ahead.

By Joseph Adinolfi

September has historically been the worst month for U.S. stocks - but not this year

In the U.S., the month of September is associated with a lot of things, including the start of school and, perhaps more important, football season. It's also known for being a particularly brutal month for the stock market.

But maybe not this year. As of Friday, U.S. stocks were on track to finish higher in September for the first time in five years, according to Dow Jones Market Data.

This represents a notable divergence from a well-established historical trend. September has a reliable track record for being the worst stretch of the calendar year for the market. In fact, Dow Jones data going back nearly a century show the S&P 500 SPX has seen an average September return of minus 1.2%, while other major indexes have seen similarly dismal results, as the chart below shows.

Stocks poised to avoid another September 'bloodbath'

These losses have been particularly acute in recent years, helping to burnish September's fearsome reputation. The S&P 500 fell nearly 5% in September 2023 and more than 9% in September 2022, according to FactSet data. Selloffs in 2021 and 2020 were also far larger than the average.

See: September is historically the worst month for U.S. stocks. What investors need to know.

"It really has been a bloodbath," Ross Mayfield, an investment strategist with Baird, told MarketWatch on Friday when discussing how stocks have fared over the past four Septembers.

But investors appear to be setting the past aside this year, as the Federal Reserve's jumbo 50-basis-point interest-rate cut has helped revive their faith in the economy, noted Thomas Martin, senior portfolio manager at Globalt Investments.

The S&P 500 has gained 1% so far this month, setting it up for its best September since 2019, the last year in which stocks tallied a September gain. It's a similar story for the Dow Jones Industrial Average DJIA, which was up 1.6% this month. Meanwhile, the Nasdaq Composite's COMP gain of 1.5% leaves it on track for its best September since 2016, according to Dow Jones data.

Stocks have rallied strongly in 2024, but the market's upward trajectory was interrupted in early August and again in early September, as investors succumbed to concerns that the U.S. economy was cooling more quickly than previously thought.

This, combined with a vicious unwinding of the Japanese yen (USDJPY) carry trade, helped trigger the worst day for stocks in two years on Aug. 5. Although the market quickly recovered, it wasn't long before markets were back in the red. The S&P 500 kicked off September with its worst weekly drop since November 2023.

Fed cut helped rescue stocks, but more volatility could lie ahead

The Fed's decision to deliver decisive easing last week has likely helped quell such concerns, Martin said.

"This year is certainly different. You have something that you haven't really had in a long time, which is a Fed easing cycle," Martin told MarketWatch during an interview. "It doesn't take a genius to say that this is the reason you've gotten this rebound."

But it's possible more weakness could lie ahead. Mayfield said he expects the near-term future for stocks will hold more wild swings like those seen over the past two months.

For one, the upcoming U.S. presidential election could inject some fleeting volatility for stocks, especially if the results are initially too close to call, or if the outcome is contested.

Elevated prices for futures contracts tied to the Cboe Volatility Index VIX, better known as the VIX or Wall Street's "fear gauge," suggest traders are bracing for such a risk, according to Matt Thompson, co-portfolio manager at Little Harbor Advisors.

Also, markets remain exposed to incoming economic data that could challenge the notion that the Fed's rate cuts will succeed in staving off more labor-market weakness - although any signs that inflation is picking back up would likely be more of a concern for investors, Mayfield said.

Keep a close eye on incoming economic data

Whatever happens, both Mayfield and Martin said they'll be keeping a close eye on fresh data on GDP growth, inflation and jobless claims due to be released this week.

These data could ultimately determine whether stocks hold on to their monthly gains or give them up.

Investors have good reason to suspect that more surprises could be in store before the month ends. If the past is any guide, the toughest stretch for stocks could still lie ahead. Since 1950, the second half of September has typically been the worst two-week stretch for stocks of the entire calendar year, according to Ned Davis Research's Ed Clissold.

It's also worth noting that the calculus changes slightly during election years. Every four years, losses in October have tended to outpace those from September, according to Carson Group's Ryan Detrick.

While more short-lived swings could briefly inflict losses on investors' portfolios, stock-market strategists see few reasons to fret about a more durable pullback. Wall Street analysts expect corporate earnings to grow by double digits in 2025, FactSet data show, which could help to justify stock-market valuations that are above their recent historical averages.

BMO's Brian Belski cited this as one reason for raising his year-end target for the S&P 500 to 6,100, now the highest on Wall Street.

Others included data showing that stocks tend to continue marching higher at an above-average pace after such a strong start to the year, according to a report shared with MarketWatch by Belski.

Roots of 'the September effect' remain a mystery

Wall Street professionals cite a number of reasons for why stocks often slide in September. Trading volume tends to rebound after a summertime lull, which could help kick up more volatility, Globalt's Martin said.

Many funds also tend to adjust their portfolios in September, taking gains from earlier in the year and opening new positions with an eye toward the end of the quarter, Mayfield said.

Adam Turnquist, chief technical strategist at LPL Financial, also noted that the window for corporate buybacks closes as companies prepare to deliver their third-quarter earnings reports.

At this point, it's also possible that September weakness has simply become self-perpetuating.

"The September effect is widely known among investors but never fully understood. While some believe it is due to traders getting back from summer vacation, it could be more of a behavioral bias or self-fulfilling prophecy," Turnquist said.

The S&P 500 fell 11.09 points, or 0.2%, on Friday to finish the week at 5,702, just below its record closing high reached on Thursday. The Dow Jones Industrial Average gained 38.17 points, or 0.1%, to 42,063.36, notching its third record finish of the week. And the Nasdaq Composite fell 65.66 points, or 0.4%, to close at 17,948.32. All three indexes ended the week higher.

Stocks were back in the green on Monday, with the S&P 500 up 0.3% in early trading at a 5,720, back near record highs. The Nasdaq Composite was up 0.3%, while the Dow was up 79 points, or 0.2%, at 42,141.

-Joseph Adinolfi

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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09-23-24 1053ET

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