Weekly Lesson Wednesday📝 

The September Effect 🍂.

^_Lesson
What Is the September Effect?

With September around the corner I thought I could enlighten you boys about the anomaly that is the September effect.

So, what is it ? Essentially, the month is sort of the rut period or bogey month for the stock market. This is backed up by historically poor returns in the month. In fact it is on average the worst preforming month for the market going back nearly a century ! Pretty staggering stuff.

It’s an anomaly. Meaning there isn’t a single answer we can point to to understand it. So, today I’m going to dive into the suspected theories, if it’s really real and if you need to worry about it.

^_Lesson
Garfield hates Mondays, Mr Market hates September ?

The theories behind the effect are vast and in reality it is probably accumulation of multiple theories. However, why many find the phenomenon so interesting is it because it rips up some of the basic ideas behind the market and investing. One of the assumptions it violates is market efficiency.

So, what’s the deal ? One of the theories widely believed is that investors return from summer vacation in September ready to lock in gains as well as tax losses before the end of the year. Which results in a large sell of stocks shrinking the market. It’s not all the Wall street bros though. There is also a belief that individual investors liquidate stocks going into September to offset schooling costs for children.

Another theory states institutional investors may also be at cause as they sell toward the end of September as the third trading quarter comes to a close. So, they can lock in some profits going into the end of the year.

Market psychology also is claimed to be a factor. according to JP Morgan Wealth Management. This reason behind the effect “isn't grounded in tangible evidence but rather is based on emotional or cognitive factors”, suggesting the drop in market performance results from investors’ belief in the September Effect rather than the effect itself !

^_Lesson
Should you panic ?

Absolutely not. The effect is more so a gimmick in my opinion. One month has to be the worst month right ? Don’t get me wrong it’s obvious there is something a foot at that time of year. The historical data and amount of singular days where shit just hit the fan in September backs that up. Like the original Black Friday in 1869, the two single-day dips in the DJIA in 2001 after 9/11 and in 2008 the subprime crisis ramped up and we all know how that went.

However, there will always be dips and this is just a time where that can be frequent. Don’t get me wrong too you won’t always be in the red for this time of the year. The month has obviously had plenty of times where it has finished positively. In fact many economists disregard it.

However, it is good to know about because if you do see losses during the month you can know not to panic and remain level headed. Especially if you are holding stocks for the long haul. It’s most likely a temporary thing.

Thank you
That’s All Folks

Thank you for reading. Like usual. Not financial advice.

Full disclaimer here

Cheers,