The September Effect: Time to Sell or a Chance to Buy Low?

The September Effect Unveiled

As summer fades and autumn approaches, investors often brace for what’s historically the toughest month for U.S. stocks: September. Dubbed the “September Effect,” this phenomenon sees the S&P 500 averaging a  negative 0.8% return since 1926, the only month with a consistent negative average over nearly a century. 

Theories abound as to why: from portfolio rebalancing by institutional investors to tax-loss harvesting and post-vacation market jitters. With stocks slumping on the first day of September trading yesterday — and fears of volatility fueled by trade uncertainty and Federal Reserve moves — many wonder if it’s time to sell everything and sidestep the seasonal dip. 

But is panic-selling the answer, or does the data suggest a smarter strategy for navigating this notorious month?

Why September Scares Investors

The September Effect isn’t just folklore; it’s backed by decades of data. Since 1928, the S&P 500 has declined in September 55% of the time, with an average loss of around 1%, making it the worst-performing month across major indices like the Dow Jones Industrial Average and Nasdaq 100. 

Significant downturns, such as the 29.6% plunge in 1931 during the Great Depression or the 8.9% drop in 2008 amid Lehman Brothers’ collapse, skew the average, but even the median return is flat at best. 

Theories point to seasonal factors: institutional investors rebalance portfolios after summer vacations, mutual funds sell underperforming stocks for tax purposes, and bond issuances spike, drawing capital away from equities. Behavioral finance also suggests a post-summer “reality check,” where investors reassess portfolios amid economic data or corporate earnings, often leading to increased selling pressure. 

This year, uncertainties like the U.S. tariff policy and anticipated Fed rate cuts add fuel to the September jitters.

The Folly of Timing the Market

Yet attempting to time the market by selling in September to avoid losses is a risky gamble. The adage “time in the market, not timing the market” holds true, as studies show that missing even a few of the market’s best days can devastate long-term returns. 

According to JPMorgan, from 2000 to 2020, an investor who stayed fully invested in the S&P 500 earned a 7.5% annualized return, but missing the 10 best days reduced that to 3.4%, and missing the 30 best days yielded a mere 0.4%. 

September’s negative average doesn’t guarantee a loss, and selling could mean missing unexpected rallies. For instance, in 2010, September saw a 9% surge, one of the year’s best months. Transaction costs and taxes — short-term capital gains at up to 37% versus 20% for long-term holdings — further erode returns from frequent trading. Staying invested through volatility often outperforms attempts to dodge it.

Should You Sell Everything?

The knee-jerk reaction to September’s reputation might be to liquidate your portfolio, but history and experts caution against it. While September’s average return is negative, it’s still positive 45% of the time, and historical data shows no consistent pattern tied to any specific year. This month could see big gains for all we know.

Last year, Investor’s Business Daily examined the data for the previous five years and found auto parts retailer O’Reilly Automotive (NASDAQ:ORLY) was one of the best-performing stocks in September, returning 0.7% on average. Last September, it returned 2.8%.

Truck manufacturer Paccar (NASDAQ:PCAR) was another, generating 0.3% average returns. It was up 2% last year. These aren’t blow-the-doors-off results, but they show there are opportunities in September.

Besides, timing the market is notoriously difficult, and as the data above shows, missing key up days can cripple returns. The better course of action is to stick to a diversified, long-term strategy aligned with your goals, not reacting to seasonal anomalies. For long-term investors, September’s dips can even offer buying opportunities, as quality stocks may trade at discounts.

The key is avoiding emotional decisions driven by headlines or historical trends, as the market’s long-term annualized return of 10.2% rewards those who stay invested.

Key Takeaway

The September Effect is real but not a guaranteed disaster. While the month has a history of underperformance, it’s not a reason to overhaul your portfolio. Economic indicators, not the calendar, drive markets, and 2025’s unique factors — like a surprisingly robust U.S. economy and potential Fed rate cuts — could defy historical trends. 

Long-term investors should hold steady, using diversification to manage risk, while traders might capitalize on volatility. Selling everything based on seasonal fear could mean missing gains and incurring unnecessary costs. As markets opened the month with a dip, history suggests that patience is better than panic.

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