According to a Nomura Securities analysis of data spanning more than three decades, the second half of September might be extremely volatile for the U.S. stock market, especially the week following the expiration of the September 15 monthly options.
According to Nomura, the “September Effect,” an apparent pattern where returns on the U.S. stock market are comparatively low in September, has been particularly severe for stocks in the week following options expiration.
The data revealed that the S&P 500 Index dropped in the week following the September options expiry in 26 of the previous 33 years, with a median decline of 1%.
This time, the Federal Reserve’s monetary policy meeting will take place throughout that week and end on September 20. Investors anticipate the central bank to maintain rates at their current level during the meeting, but they are on the lookout for signs that they may be planning another rate increase for later this year.
According to Charlie McElligott, a strategist at Nomura, the decline may be attributed to selling by consumers and mutual funds in connection with the fiscal year end.
In order to make their portfolios appear more appealing to investors, mutual funds frequently sell equities in September before the Oct. 31 tax year-end. This practise, known as “window dressing,” can have a negative impact on stocks.
Additionally, individual investors may sell equities in September to pay their projected taxes, which might put pressure on the market.
Investors are preparing for a number of market-moving triggers in the coming days, including Wednesday’s report on U.S. consumer prices, as the S&P 500 is already down 0.9% month to date.
One possible bright spot is that, according to Tallbacken Capital Advisors’ analysis, September usually turns out well when stocks have gained for the January-August time frame, as they have this year.
The overall mean return for all 95 Septembers since 1928 is -1.1%, but when the S&P 500 index was up more than 10% through August for 34 years, the equities on average up 0.3% in September, according to the firm’s data.