As Is Often the Case, September Was a Difficult Month for Stocks…We See More Than Seasonality!

October 5, 2020
As Is Often the Case September Was a Difficult Month for Stocks…We See More Than Seasonality

“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

–  Mark Twain

September gets a bad rap for having the tendency to generate historically negative returns in the stock market. The lousy reputation is well deserved. Rocky performance this time of year is not unusual as, on average, the S&P 500 declines by 1% in September, based on figures going back to 1928. As Mark Twain noted in the quote above, October can also be precarious and has witnessed some big moments of decline during the month, such as October of 1929 and 1987, which saw single day swoons of 12.8% and 22.6% respectively during the month. That said, based on data, September is actually the worst month of the year for stocks.

For those trivia bugs curious about the data for October, it has only generated 38 down months during the 91 years of data going back to 1928 and lesser average declines of 4.7% in those down periods. Further, on average, October has generated positive returns of 0.4% versus September’s average 1% decline, thanks to the 53 Octobers when the index advanced.1 That’s the data. Our point is that this tends to be a seasonally challenging period for the market. Are investors more focused and critical of their portfolios as they return to the office after a summer break? Do they come back from vacation and decide to sell their losers or raise cash to pay for tuition and back to school obligations? There is no clear rationale here, but there does seem to be a pattern or biorhythms to these results in general.

S&P 500 Index Average Percent Change Each Month 1928-2020

Source: Yardeni

The experience this September was in keeping with the tendencies outlined above. Specifically, the S&P 500 fell 3.9% for the month.2 But, there seems to be more than seasonality behind these results. We are not surprised that we see some retrenchment after the swiftest recovery rally off of a 30%-plus market swoon in history. After all, it was just back in that 33-day February/March period when the S&P 500 plunged 35%; it has surged roughly 50% off that trough and recouped all-time highs in just 103 days…such a swift recovery is rare and profit taking is expected on the heels of such strength.

S&P 500 Trading Days to New High Following -20% or Worse Decline

Our message throughout this COVID-19 period has been to hold your ground. We have maintained our 3500 price target for the S&P 500 by mid-2021 in the midst of the angst this past spring when the S&P 500 had declined to 2235, and many experts were calling for an ugly bear market and revising S&P 500 targets down to 1800 and below. Our recommendation was for clients to maintain their stock exposure. We had confidence that significant fiscal stimulus and accommodation from the Federal Reserve would support the market through this temporary period of shutdown to invest in our health. Our objective was to help our clients avoid the whiplash that could have occurred if they exited the market in the spring, due to headlines and fear, and miss a recovery that we thought was likely based on our research and related evaluation of the fundamental, valuation and technical data.

Where From Here?

At this juncture, we see a more mixed and nuanced picture in the stock market after the hard rally we’ve experienced. Yes, the economic data has improved markedly, as we anticipated, and reflects a v-shaped recovery in various metrics in Q3. This includes not only gross domestic product (GDP), which is expected to advance a robust 30%-35% for the three months ended Sept. 30, 2020.3 It also includes items such as housing and auto sales, levels and growth in personal disposable income, and improvement in the employment picture, with half of the lost jobs already regained.

Furthermore, we are seeing positive trends in confidence measures on the part of consumers, small- business owners and corporate CEO’s. The credit markets are well-behaved and supportive of a stabilizing picture for the economy. Yet, with additional fiscal stimulus measures stalled at present and a vaccine perhaps months away, there is some uncertainty as to whether the economic recovery will be sustained adequately or it at least inspires questions about its future pace. Other factors that cloud the picture a tad include the potential for a contested election and a recent resurgence in daily coronavirus cases in the United States. Current data gives us conviction to maintain our 3500 S&P target, but the uncertainties above lead us to believe we may be in a period of volatility and a trading range for several months before advancing more consistently to higher highs. We are reluctant to raise our price target above 3500 until we get past some of the angst in the market surrounding election rhetoric, gridlock on additional stimulus, and can develop a clearer picture on the ramifications of rising COVID cases. Following a nice rally like we’ve experienced, this is a great time to talk with your wealth advisor to make sure your equity allocation, which has benefitted from the significant move off the bottom, is at appropriate, balanced levels.

Small Business Economic Trends Recession Periods

Source: FactSet 

US Daily New Covid-19 Cases 14 Day Rate of Change of the 7 Day Average

Source: University of Oxford

Election and the Markets

No doubt the election has only become more front and center following the recent first debate. We truly believe the ramifications of who wins will be far better than feared, regardless of outcome. Wall Street loves gridlock, so split leadership should be a positive for the market in the long term, despite the short-term angst caused by the fear of the unknown that is normal in all election years.

While some investors may be worried that we will witness a Democratic sweep and that it could result in a dramatic policy change, we think this fear is far overdone, should such a sweep occur. This last comment is not a political statement, this is merely analysis of economic impact. Specifically, the biggest economic fear of a sweep election is that it would result in major tax increases and thus a sharp reduction in S&P 500 EPS levels and growth. As the chart below illustrates, such Biden-led related tax increases could negatively impact S&P 500 earnings, but his policies related to infrastructure spending and tariffs could be positive [SF1] drivers to earnings…such that the latter could potentially offset the negative impact of the tax increases…which could result in very little net economic impact.

S&P 500 EPS Sensitivity to Democratic Policy

Source: J.P. Morgan

Our point again is that true economic consequences of major regime changes tend to be minimal, and the market eventually rallies and advances on this better-than-feared epiphany on the part of investors. That said, the normal knee-jerk, negative reaction that investors display during periods of potential regime change keeps us cautious in the short term. This is part of our thesis that we may be trading- range bound for a bit. The potential for a contested election, if the voting share is anywhere close, also keep us cautious short term. The Gore-Bush contested election was accompanied by some volatility, but it was moderate and gives us comfort that any pullback related to controversy here should be short and shallow as well.


Our hold your ground view has served us well. While the economic data appears to be solidly on a recovery path at present, there is some question as to whether this is sustainable. There are several wall of worry items that will give investors pause over the next several months. This is a good time to talk with your wealth advisor about your current asset allocation and evaluate positioning after a nice rally like we’ve seen.



3Federal Reserve of Atlanta

The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation.

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