Wall Street is Bracing for September Curse Again. What's New and How to Tackle It
The US stock market has seen four consecutive months of monthly gains, with the $S&P 500 Index (.SPX.US)$ continuing its strong rebound in August by rising 2.3% and approaching historical highs before the sharp drop in Summer. Now, Wall Street is gearing up to face what is historically known as the worst month for the stock market - September.
Since 1990, the S&P 500 has seen an average loss of 1.04% in September and ended in green only 47% of the time. This seasonal effect has been particularly pronounced in recent years, with the S&P 500 posting declines of 3.9%, 4.8%, 9.3%, and 4.9% in the past four September (2020-2023).
However, this year seems to be different. The election year and potential rate cuts have introduced new possibilities for market performance in September, and investors are eagerly seeking ways to protect their portfolios from volatility.
Various explanations exist for the so-called "September Effect" in the US stock market. Some possible reasons include:
● Increased volatility as traders return to the market post-holidays: During the summer, many traders are on vacation, leading to reduced trading activity and lower market volume. When they return to the market in September and reassess their portfolios, trading activity significantly increases, leading to higher volatility. Citigroup's analysis of data since 1928 shows that the average realized volatility of the S&P 500 in September is 1.5 points higher than in August.
● Increased selling pressure from institutional investors: End-of-quarter reports and tax effects are major factors explaining this seasonal artificial selling. As the Q3 trading season comes to a close, mutual funds may sell losing stocks at the end of September to avoid them appearing in quarterly reports or sell profitable stocks to lock in profits. Additionally, mutual funds must engage in year-end tax-loss harvesting by October 31, giving them more incentive to sell losing positions in September to reduce the scale of capital gains distributions.
● Household selling of stocks to pay for education expenses: Some theories suggest that many individual investors tend to sell some of their holdings in September after the end of summer holidays to realize gains and use the proceeds to pay for tuition, back-to-school supplies, or even credit card bills from vacations.
● Pessimistic market expectations: Historical September events, such as Black Friday in 1869, the 9/11 attacks in 2001, and the exacerbation of the subprime mortgage crisis in 2008, have contributed to heightened risk aversion among some investors during this time. Seasonal mood disorders also exacerbate the volatility in the US stock market in September.
This September appears to be shaping up differently due to the combination of being an election year and the anticipated first rate cut of the year.
● September Rate Cut: The market widely expects the Federal Reserve's policy meeting on September 18 to bring the first rate cut of the year. According to the CME FedWatch tool, traders currently see a 100% probability of a rate cut in September, with a 71% chance of a 25 basis point cut. If this Friday's jobs report shows significant weakness again, speculation about a 50 basis point cut may increase.
● Election Year: Historically, September in a presidential election year has been relatively less negative for the stock market. In all post-World War II election years, the $Dow Jones Industrial Average (.DJI.US)$ has averaged a 0.58% decline in September, significantly lower than the average decline of 1.37% in non-election years. SoFi's Young Thomas explains that in election years, volatility peaks in mid-October, rather than at the end of September. The market is closely watching the first face-to-face debate between Harris and Trump next week, as both have agreed to participate in the debate hosted by ABC News on September 10th.
Regardless of the reasons behind the September curse, and whether the market will once again face difficulties this year or overcome the curse, for some cautious investors, staying vigilant will do no harm. They are also looking at more potential trades to avoid this seasonal volatility.
● Volatility Trading: Wall Street's "fear index" $CBOE Volatility S&P 500 Index (.VIX.US)$ has now dropped to 15. For comparison, this index surged to unprecedented levels above 65 during the market sell-off in early August.
Some analysts have pointed out that due to the significant decrease in the short-term implied volatility of the S&P 500 from its peak levels, investors can bet on an increase in volatility and hedge portfolio risks when the VIX index drops to around 15 or lower. This bet can be made using single-leg options or a low-cost hedging tool - a VIX call spread.
A VIX call spread involves buying a VIX call option with a lower strike price and selling a VIX call option with a higher strike price, both with the same expiration date. This strategy allows investors to profit from a moderate increase in the VIX while reducing costs by selling the higher strike price call option.
● High Dividend Trading: Generally, in a lower interest rate environment, the investment value of sectors with high dividends such as utilities and consumer staples becomes more prominent. In the face of potential market volatility, stocks with stable dividend growth and high free cash flow yields in these sectors also have stronger defensive attributes. If their valuations are relatively low, the margin of safety will be higher. Sandy Villere, portfolio manager at Villere & Co, said, "If you expect more volatility in September than usual, it's time to sell offensive stocks and buy defensive stocks."
● Cash is King and Opportunity Awaits: Historical data shows that after the slump in September, US stocks tend to experience a relatively strong rebound in the following fourth quarter. Since 1990, the win rates for US stocks in October, November, and December have been as high as 65%, 71%, and 76%, respectively, with gains exceeding 1% in each month. This suggests that accumulating cash and buying fundamentally strong stocks during market downturns could be a viable strategy.
Source: Business Insider, Bloomberg, MarketWatch
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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