There is a constant debate that goes around the investing community with both local and global markets during the ninth month. It’s called the ‘September Effect’. It’s a well-known theory where prices perform worse, on average, compared to the performance for the rest of the year.
For instance, the S&P 500 has declined in September more than half the years since 1928, according to S&P Global. While over the past 10 years, the NASDAQ has declined an average of 2.77%.
We aren’t exactly sure why it happens, but we have some speculations.
Four possible reasons for the ‘September Effect’
Reason #1: The final quarter of company earnings are released
When September comes, it means one thing financially.
We’re in the final quarter of the year. This is where investors become worried about the upcoming third-quarter earnings as the summer sales are coming to an end.
Instead of buying stocks and other financial markets, they instead decide to hold onto their cash which leads to a drop in stock prices.
Reason #2: Investors are cashing up to pay their dues
As I mentioned, many US and European investors are coming back from their summer holiday. And instead of piling their money back into the markets, they’re locking in their gains as well as their tax losses before the year ends.
This is to pay their duties such as children’s’ school fees, properties and other yearly obligations.
Reason #3: Big companies are also cashing up
Not only are private investors closing their positions, but so are many mutual and hedge funds who are cashing in their holdings to harvest their tax losses.
Reason #4: Self-fulfilling prophecy
As you may have heard of the January Effect, Santa Clause Rally, Sell in May and go away and the September Effect –traders are simply reacting to the current environment action that always takes place at these times of year.
NOTE: Remember, the American stock markets are leading indices. So, when America falls, we tend to follow their movements.
Of course, it doesn’t mean the September Effect will happen this year. But it’s good to know so you can act accordingly with your own investments.
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