What drives the September effect

What drives the September effect

While some seasonal patterns in finance can be chalked up to coincidence or superstition, the September effect appears rooted in practical, repeatable dynamics. Understanding these drivers allows investors to better position portfolios in anticipation of recurring behavioural and institutional cycles.

One key factor is the end-of-summer rebalancing. Institutional players—hedge funds, pension funds, and mutual funds—often reassess risk exposure and adjust asset allocations after a quiet August. This can result in broader selling pressure, especially if macroeconomic data from Q3 suggests slowing momentum or rising risk.

Tax strategies and capital flows

In the U.S., September aligns with fiscal-year-end for many funds, prompting portfolio managers to engage in tax-loss harvesting—selling off underperforming assets to offset capital gains. This practice, while beneficial for tax strategy, adds to market pressure, especially in weaker sectors or lagging stocks. The ripple effect is often felt globally, as foreign investors adjust exposure based on perceived U.S. risk levels.

• Fund managers sell losers to lock in tax deductions

• Macro data (like nonfarm payrolls, inflation) often disappoints

• Geopolitical tensions tend to spike post-summer

• Q3 earnings pre-announcements can trigger fear

• Currency fluctuations create volatility in global ETFs

Additionally, psychological biases may be at play. After summer vacations, retail investors often re-engage with markets and react emotionally to negative news. The media also tends to amplify downturns in September, reinforcing bearish sentiment. This feedback loop can magnify small corrections into meaningful pullbacks.

Add in increased government shutdown risks in the U.S., central bank decisions in Q3, and waning liquidity, and you've got a perfect storm. The September effect isn't just folklore—it's a convergence of behavioural finance, macro triggers, and tactical shifts.

Why markets often fall in September

Why markets often fall in September

September has long been considered an anomaly in the investment calendar. Since 1928, the S&P 500 has averaged a loss during this month, a trend mirrored in other major indices including the FTSE 100, DAX, and Nikkei. Analysts call this seasonal pattern the "September effect," and while it's not guaranteed, its consistency across decades makes it worth serious investor attention.

The reasons behind this phenomenon are numerous. Some experts point to the end of the US fiscal year for mutual funds, which often triggers tax-loss harvesting and portfolio reshuffling. Others cite post-summer reallocation by institutional investors returning from holidays, re-evaluating positions with a more cautious or conservative tilt. There's also the psychological angle: after typically strong summer months, some investors expect a breather or correction.

Historic data backs the trend

The numbers don’t lie. According to LPL Research, since 1950, the S&P 500 has averaged a 0.54% drop in September, with negative returns in nearly 55% of years. In the UK, the FTSE 100 has posted an average loss of around 1.1% during September over the last 30 years. Emerging markets also show a similar tendency, driven in part by global fund flows.

• S&P 500: average -0.54% return since 1950

• FTSE 100: average -1.1% in September since 1993

• Nikkei: underperforms in September more than half the time

• DAX: volatile performance, with sharp drops in crisis years

• MSCI EM Index: generally weaker inflows in Q3

Though past performance doesn't guarantee future results, this persistent dip suggests a seasonal behavioural trend among market participants. The key takeaway: September is not the time to go on autopilot with your investments.