You might think that October is the worst month for stocks, given that history's major market crashes always seem to happen in that month. However, danger could be lurking sooner than you think for your holdings in growth darlings like Palantir and Nvidia.
Believe it or not, September is actually the weakest month of the year for stock performance. The Dow Jones Industrial Average, the S&P 500 and the Nasdaq composite all offer their worst average return during this period, according to Dow Jones data.
On average, the Dow suffers a 1.1% decline, the S&P 500 falls 1.1% and the Nasdaq composite drops 0.9%. Small cap investors have bragging rights, as it is only the second-worst average return of any month for the Russell 2000, with an average decline of 0.6%.
Does that mean investors are in for a rocky ride next month?
It has been a roller-coaster year so far for the stock market, but major indexes are all holding solid gains heading into September. Palantir and Nvidia, in particular, have done well.
Still, investors should be on their guard.
History Weighs On Market Psychology, But Note This
Throughout the stock market's history, there are three months that haunt investors: October 1929, October 1987 and October 2008, all denoting major plunges in the stock market. The first started the Great Depression, the second put a quick halt to a massive five-year bull run, while the third started the Great Recession.
But John Longo, distinguished professor of finance and economics at Rutgers Business School, told Investor's Business Daily there are a number of factors in play — not the least of which are historical headwinds — that point to September's chilling effect.
"The Crash of 1929 began in September, so some people have that month at the back of their minds as a bad month for stocks," he said. "It sometimes becomes a self-fulfilling prophecy due to market psychology."
Sometimes that self-fulfilling prophecy isn't always fulfilled, however. In September 2024, the S&P 500 rose 2%, the Nasdaq gained 2.7% and the Dow Jones index climbed 1.9%. The Russell 2000 notched a slimmer lift of 0.6%.
Further, each index has actually managed to turn in a gain in four out of the past 10 years. It shows the stock market tends to react to any inefficiencies, which means old patterns tend to become less pronounced over time.
Seasonal Effects, Rebalancing Affect Stock Market
Still, a couple of different crosswinds can make performance lag in September.
"Retail spending tends to splurge during the summer for family vacations as well as during the holiday season near the end of the calendar year," Longo noted. "Hence, the September-October period often results in a lull in spending as investors pay their summer bills and save for future purchases."
In addition, there are impacts as fund managers look to spruce up their holdings ahead of the end of the year. Tax-loss selling is also in play.
"The reason for September's poor performance could be due to mutual fund window dressing," CFRA Chief Investment Strategist Sam Stovall told IBD. "Many have October fiscal year ends, so they want to unload the underperformers — so they don't have to admit that they owned them."
In addition to this, quarterly rebalancing also occurs among other funds around the same time, further impacting results.
However, there is definitely a camp that believes the month ahead could be a constructive one for stock market investors. Adam Parker, founder and chief executive at Trivector Research, told IBD he is upbeat heading into September.
"We don't expect a bad September," he said. "The AI dream is alive, the Fed looks directionally accommodative, and gross margins can likely go up for the median stock. That's a three-pronged bull case that's hard to fade."
The Bull Case For Growth Stocks
CFRA's Stovall noted that there are a number of stock market sectors that boast historical outperformance during September.
"Not surprisingly, the defensive sectors — consumer staples, energy, health care, utilities, and the old telecom sector, now called communication services — held up the best while the deeper cyclicals gave up the most," he said.
However, information technology, communication services and consumer discretionary are the areas Stovall recommends the most, looking 12 months out.
Trivector's Parker, who was previously director of global quantitative research at Morgan Stanley, also made a case for high quality growth stocks, noting that Big Money could use any pullback as an opportunity to increase their holdings.
"Most institutional investors believe that AI productivity is coming in 2026 and 2027, so they want to buy high-quality growth stocks if they somehow do sell off in September, leading us to believe, absent a material shift in the outlook, that stocks won't sell off that much this year in September given this productivity dream is still alive," he said.
But Note These Potential Headwinds
Yet there are a number of things that could potentially upset the apple cart in September.
U.S. Bank Asset Management chief equity strategist Terry Sandven told IBD that the impact of tariffs and the Fed's decision on interest rates could weigh.
He believes tariff mitigation strategies "remain works-in-progress" and that there is still uncertainty around "whether suppliers, companies, or consumers will ultimately absorb the bulk of tariff costs."
Depending on how this ultimately shakes out, it could weigh on corporate profitability. Upward or downward revisions to earnings could drive stock price adjustments.
Sandven said the Federal Open Market Committee's decision on interest rates Sept. 17 "will undoubtedly impact investor sentiment."
What Stock Market Investors Should Do
Longo, who is also chief investment officer at Beacon Trust, said it is important that investors stay the course amid the uncertainty.
"The possibility of stock market volatility in September or October should not impact the plans of any long-term investors," he said. "If someone is putting cash into the stock market in the near future, I would recommend a dollar-cost-averaging approach to mitigate risk."
Art Hogan, chief market strategist at B. Riley Wealth Management, also said it is important that investors do not overreact to stock market volatility.
"While September does have a long history of being the weakest month of the year for stocks, we would never recommend that long-term investors make any changes to their diversified portfolios because of the calendar effect," Hogan said.
Investor's Business Daily is currently recommending stock market exposure at the 80%-to-100% level. It is a good time to be investing in stocks that are clearing proper buy points, but investors should also make sure they pay attention to any sell signals that are flashing within their portfolio.
Common defensive sell signals include breaches of the key 50-day moving average. When a stock clears its 20% profit target from a buy point it is also an opportunity to sell at least a portion of a position to lock in gains.
Please follow Michael Larkin on X at @IBD_MLarkin for more analysis of growth stocks.
