The U.S. stock market is poised for a potentially tumultuous second half of September, particularly in the week following the September 15 monthly options expiration, as indicated by a Nomura Securities analysis spanning over three decades.
Referred to as the “September Effect,” this apparent pattern reflects relatively subdued U.S. stock market performance in September, with a notable focus on the week after options expiration, according to findings by Nomura.
In 26 out of the past 33 years, the S&P 500 Index experienced declines during the week following the September options expiration, with a median decline of 1%, as revealed in the analysis.
This time around, this challenging week coincides with the Federal Reserve’s monetary policy meeting, set to conclude on September 20. Investors are anticipating the central bank to maintain interest rates during this meeting but are keenly seeking hints about potential future rate increases.
Nomura strategist Charlie McElligott has suggested that this weakness in the market may be attributed to selling activities related to the fiscal year-end for mutual funds and tax-related selling by households.
Mutual funds often engage in stock selling during September ahead of the October 31 tax year-end. This strategy, known as “window dressing,” is employed to enhance the appeal of their portfolios to investors, potentially exerting downward pressure on stocks.
Furthermore, September can witness selling pressure from individual investors who may liquidate assets to meet their estimated tax obligations.
Notably, the S&P 500 has witnessed a 0.9% decline month-to-date, and investors are preparing for several market-moving events in the coming days, including the release of the U.S. consumer price report on Wednesday.
There is a potential silver lining, however. When stocks have rallied during the January to August period, as they have in the current year, historical data analyzed by Tallbacken Capital Advisors indicates that September tends to yield positive results.
While the overall mean return for all 95 Septembers since 1928 stands at -1.1%, examining the 34 years when the S&P 500 index had risen by more than 10% through August reveals an average gain of 0.3% for stocks in September, according to the firm’s analysis.
