Understanding the September Reset in U.S. Markets
Explore why September has historically been a volatile month for investors and how to navigate this seasonal trend
What is the September Reset?
The "September reset" refers to a historical pattern in U.S. financial markets where September often brings increased volatility and downward pressure on stock prices. After typically quieter summer months, trading activity resumes in earnest after Labor Day, with investors reassessing their positions and making strategic adjustments for the remainder of the year.
This phenomenon is also sometimes called the "September effect" and has been particularly observed in the S&P 500 and Dow Jones Industrial Average. While not occurring every year without exception, the pattern has been consistent enough over decades to warrant attention from market analysts and investors.
Historical Context and Data
Historical market data reveals that September has traditionally been the weakest month for U.S. stocks. According to data from the Stock Trader's Almanac, since 1950, the S&P 500 has averaged a decline of 0.5% during September, making it the only month with a negative average return.
Some of the most significant market crashes and corrections have occurred in September or October, including the crashes of 1929, 1987, and 2008. While these major events don't happen every year, they contribute to September's reputation as a risky month for investors.
What Causes September Volatility?
Several factors contribute to the September reset phenomenon:
End of Summer Trading Lull
With many traders and portfolio managers returning from summer vacations, trading volume increases significantly in September. This renewed activity often brings more decisive moves as professionals adjust their portfolios.
Quarter-End Portfolio Rebalancing
Institutional investors frequently rebalance their portfolios at the end of the third quarter, which can create significant market movements as large blocks of stocks are bought or sold.
Psychological Factors and Market Memory
The historical reputation of September as a weak month can become a self-fulfilling prophecy as investors anticipate volatility and adjust their behavior accordingly.
Political and Economic Calendar
September often marks the return of legislative activity after summer recess, bringing potential policy changes that can affect markets. Additionally, the approach of Q4 leads companies to update forecasts, which can create uncertainty.
Recent Trends and Changes
While the September effect has been historically significant, its impact has somewhat diminished in recent years. From 2010 to 2021, September showed positive returns in 7 out of 12 years, suggesting that the pattern may be weakening or becoming less predictable.
Some analysts attribute this change to the increasing dominance of algorithmic trading, which may be less influenced by seasonal patterns than human traders. Additionally, global interconnectedness of markets means that U.S.-specific seasonal factors may be diluted by international influences.
Investment Strategies for September
While investors shouldn't make drastic portfolio changes based solely on calendar effects, being aware of seasonal patterns can inform smarter investment decisions:
Key Takeaways for Investors
• Don't make panic decisions based solely on seasonal patterns
• Consider using September volatility as an opportunity to buy quality assets at discounted prices
• Ensure your portfolio is properly diversified to weather potential market turbulence
• Review your risk tolerance and investment horizon - if you're investing for the long term, short-term volatility matters less
For those concerned about September volatility, strategies such as dollar-cost averaging, setting appropriate stop-loss orders, or slightly increasing cash positions in August can help manage risk without significantly altering long-term investment strategies.
Frequently Asked Questions
No, the September reset is not a guaranteed decline. While historical data shows September has on average been weak, it has posted gains in many years. The pattern reflects statistical tendencies rather than certainties.
Long-term investors should generally not make significant portfolio changes based on seasonal patterns. Instead, they should maintain a well-diversified portfolio aligned with their financial goals and risk tolerance, recognizing that short-term volatility is normal in markets.
While the September effect is most documented in U.S. markets, similar seasonal patterns have been observed in some other markets around the world, though the specific timing and strength of these patterns vary by country.
Yes, many analysts believe the September effect has weakened in the past decade. From 2010-2021, September showed positive returns more often than not, suggesting changing market dynamics may be reducing this historical pattern.