[Reuters Analysis] Anxious Wall Street braces for jumbo 'September effect': McGeever

By Jamie McGeever

ORLANDO, Florida, Sept 2 (Reuters) - Data going back decades shows that, on average, September is the worst month for U.S. stocks – and by a considerable margin. So should investors brace for another bumpy ride this year? Almost certainly, and not just because of the "September effect."

If the market saying "Sell in May and go away" had any validity, September would be a bumper month, with investors returning from their summer holidays eager to buy back stocks that, presumably, had become cheaper since Memorial Day.

But history suggests the opposite.

Since 1950, the S&P 500's average return in the month of September is -0.68%, according to Carson Group's Ryan Detrick. If you round to one decimal place, September is the only month with an average negative return in the last 75 years.

And there have been more "down" than "up" Septembers over this period. The S&P 500 has only posted positive returns in September 44% of the time since 1950, the lowest positivity rate for any calendar month and the only one below 50%.

And the performance appears to be getting worse. In the last decade, the S&P 500's average September return has been near -2%.

TOTAL OUTLIER

There is no obvious explanation for those seasonal factors.

Some analysts point to the looming fiscal year-end, as fund managers may seek to dump their worst-performing stocks. Others say tax-related selling is a factor, again because fund managers are shedding their losing positions, this time to limit or offset capital gains.

Investor psychology could also be at play. Investors, having experienced decades of lousy Septembers, may return from their summer holidays expecting a tough month. This caution can turn into pessimism, which can lead to selling, resulting in a self-fulfilling prophecy.

However dubious these explanations may be, the numbers don't lie. For much of the last century, September has been the cruelest month for global equity investors.

EYES WIDE OPEN

The stage is set for a particularly rocky September this year.

Wall Street's main indexes are at or near record highs, valuations are getting stretched, especially in the tech sector, and market concentration has never been greater.

True, momentum appears to be on the bulls' side. The S&P 500 and Nasdaq have been up for four and five consecutive months, respectively. And as the second quarter earnings season wraps up, nearly 80% of companies have reported profit and revenue above analysts' estimates, compared with long-term averages of 67% and 62%, respectively, according to LSEG data.

On top of that, investors can likely expect a Federal Reserve rate cut on September 17, if rates futures market pricing is accurate.

But all of that is already "in the price," to use traders' parlance. And Wall Street's momentum is slowing as monthly gains have steadily diminished over the summer, especially for the Nasdaq, which rose 1.6% in August compared with 9.6% in May.

What happens next will likely largely depend – like most things in markets this year – on what happens in the technology sector. Tech stocks are by some valuation metrics the most expensive they have been since the dotcom bubble burst 25 years ago.

Investors appear to have noticed, as they have recently started rotating out of tech and into cheaper small caps. Given the record-high market concentration in this sector, a continuation of this trend could weigh heavily on the broader market.

So this September could be volatile, at the very least. Past results are no guarantee of future performance, of course. But caution is warranted. As Porter Collins, co-founder of Seawolf Capital, recently posted on X, when markets are this extended, an "eyes wide open approach" is advisable. With so many potential catalysts for a correction looming this September, investors would be wise not to look away.

(The opinions expressed here are those of the author, a columnist for Reuters)

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