September Historically Worst Month for Equities, Could This Year be Different?

Markets might anticipate a lower return period as September approaches which theorists suggest to be a "seasonal behavioral bias"

Last week the market made history over its course, railing highest in history. The rallying followed as FED chair Jerome Powell in his speech directed the market on its possible timeline on the pullback of monetary stimulus.

However, as the rallying continues on the other hand pressure mounts on the market as September approaches being the historically “worst” month in terms of generating returns for the global equity market. Investors might put risk on mode for the next four weeks. Since 1928, the U.S. market on average generated a return of -0.1% in September.

In terms of calendar risk, this month has plenty to add to the investor’s sentiment. One of the main risks the market is anticipating is how much FED will cut back on its asset purchases which could be indicated during its meeting on September 22. However, the market should get some clear signs on coming Friday as US payroll numbers are released. Powell in his statement highlighted inflation target has been met with the excess above target level is transitory and he is closely watching the unemployment indicators which should dictate the number on books for cut back on asset purchase. Adding to these, eyes are also on increasing delta cases in the U.S.

Although there is no plausible explanation for the “September effect”, Investopedia puts it as “seasonal behavioral bias”. Among several possible hypotheses that try to explain this phenomenon, October 31 marks the mutual funds tax year-end. Accordingly, fund managers dump their losing position in September. Another school of thought suggests that most investors go on holiday during this time which anticipates lower active trading.

However, whatever different hypothesis suggests the financial market tends to weigh higher on historical trading patterns. It is expected investors will maintain a cautious momentum during this time both at home and abroad.

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