What is the September Effect?
The September Effect is a phenomenon where the market returns and performance are historically weak, particularly around September. Although there is historical and statistical precedence for the September Effect, the cause and explanation are rather anecdotal and subjective. The general belief is that investors returning from their summer vacations in September are set to lock in their gains and their tax losses before year-end. Similar to other calendar effects, such as the October effect, the September Effect is considered a historical anomaly or quirk rather than an effect with any causal relationship.
The effects of the September Effect are not limited to any particular international or national stock exchange or market. However, the September Effect is a global phenomenon wherein a few markets have seen negative market returns for September over the last 100 years such as the DJIS (Don Jones Industrial Average). Yet, it is difficult to place any bets against September regarding stock returns as there’s only anecdotal and historical evidence of a poor stock return.
An explanation for the September Effect
As mentioned, there is no cause and effect relationship when it comes to the September Effect and it is not limited to the markets of any one particular nation. Although, there are logical theories as to why the September Effect takes place.
Many analysts and experts believe that the negative market returns seen in September are attributable to seasonal behavioural bias presented by investors as they aim to cash in before the end of the year. The belief also stems from the idea that individual investors liquidate their stocks to offset their children's educational costs. Another viable reason may be that most mutual funds cash in their holdings to harvest tax losses.
What is the October Effect?
Just as the September Effect is a historical quirk without major precedence or cause-effect reasoning, we have the October Effect. The October Effect is the opposite of the September effect as October often sees positive market returns and performance. Similar to the September Effect’s negative performance over the last 100 years, the October Effect has seen a positive market performance over the last 100 years even during economic turmoil or unforeseen usually market devastating events.
Although analysts and experts have seen a recent decline in the October Effect, the month of October still seems to have a positive impact on the market with only anecdotal support to explain this anomaly.
Final Words
The September Effect refers to a historically negative and weak stock market performance in September limited not to any one nation or market. This anomaly has no particular cause and effect relationship, rather logical hypotheses to provide reasoning for this historical quirk. We suggest you take advantage of October and September this year with a broker that benefits you all year round! Open a Demat account with IIFL Securities today to learn about new technical and fundamental analysis techniques to add to your knowledge base and to stay on top of all the hot stock picks every month.