September is historically the worst month of the year for stocks. Why this time could be different.

By Isabel Wang

Seasonal weakness usually fades in September when the stock market trends higher into the month

The arrival of autumn has historically been an underwhelming time for stock returns.

The back-to-school season isn't the only source of stress in September. For Wall Street, it has long carried a reputation as the most challenging month of the year for U.S. stocks - marked by seasonal weakness and a higher likelihood of volatility after the quiet summer months.

And this time around, with a pivotal jobs report and a potential interest-rate cut from the Federal Reserve on the horizon, the macro market backdrop looks increasingly uncertain.

History shows that the Dow Jones Industrial Average DJIA has generated an average monthly decline of 1.1% in September and finished higher only 42.2% of the time dating back to 1897, according to Dow Jones Market Data.

September has also been the worst month of the year for the S&P 500 SPX and the tech-heavy Nasdaq Composite COMP, which have averaged monthly declines of 1.1% and 0.9%, respectively. The S&P 500 has finished higher only 44.9% of the time since 1928, while the Nasdaq has registered positive monthly returns 51.9% of the time dating back to 1971, according to Dow Jones Market Data.

SOURCE: DOW JONES MARKET DATA

"The financial markets often shift gears in September, moving away from the quiet summer months marked by low trading volumes and limited volatility, and entering a period historically associated with seasonal weakness and increased market instability," said Adam Turnquist, chief technical strategist at LPL Financial.

To be sure, seasonal trends should always be viewed in the context of current market conditions, as they simply reflect the broader market climate rather than the immediate setup on Wall Street - meaning stock performance in September doesn't necessarily have to follow any seasonal script.

See: These underdog stocks are leading Wall Street gains in August while Big Tech takes a backseat. Will it last?

History also suggests that seasonal weakness usually fades in September on occassions when the stock market trends higher going into the month. In other words, September doesn't look so scary when August holds up.

And U.S. equities were on a tear in August, as economically sensitive stocks roared back amid optimism that the Fed is ready to cut interest rates for the first time in 2025. Consumer prices have lately only risen slightly due to tariffs, and the labor market may be losing steam at a quicker pace than previously thought - factors that appear to support the case for a Fed easing.

The Dow Jones Industrial Average advanced 3.2% last month, booking its best August performance since 2020, while the Nasdaq Composite gained 1.6% and the S&P 500 rose 1.9% in the same period. Small-cap stocks, as measured by the benchmark Russell 2000 index RUT, popped 7% in August - with the index logging its best month since November and its best August in 25 years, according to Dow Jones Market Data.

"Since 1950, when the S&P 500 is above its 200-day moving average going into September, the average price return for the month jumps to 1.3%, with 60% of occurrences producing positive results," Turnquist said in a Thursday client note. "This compares to an average September price decline of 4.2% and positivity rate of only 15% when the index is below its 200-DMA going into the month."

The 200-day moving average is usually considered a key indicator for determining the overall long-term trend of a stock index. The S&P 500 ended at 6,460.26 on Friday afternoon, comfortably holding above its 200-day moving average of 5,957.05, according to FactSet data.

See: Here's what happens to stocks when the S&P 500 rises above its 200-day moving average

Turnquist also added that while September's seasonal weakness may be "an ancillary factor" weighing on the stock market's performance, other "more powerful macroeconomic forces," such as the health of the U.S. economy and corporate America, could ultimately drive future stock performance.

Key events shaping the U.S. stock market in September include next week's August employment report, which will show whether July's labor-market slowdown is gaining steam, and the Fed policy meeting scheduled for Sept. 16-17, when policymakers are widely anticipated to cut interest rates by a quarter of a percentage point to a range of 4% to 4.25%.

While a rate cut in September seems very likely, the key uncertainty is "whether it will be a dovish or hawkish cut," and that will depend on the upcoming inflation and labor data between now and mid-September, Turnquist told MarketWatch in a follow-up interview on Thursday. "Overall, there's a lot of uncertainty heading into September."

Turnquist also said the stock market may be overbought in the short term, "as much of the good news, like the expectation of the economy executing a soft landing and avoiding a recession, seems to be priced in.

"While this is fair, I wouldn't be surprised to see a reality check to reflect some of the uncertainty that we have to get through over the next few weeks," he added.

See: Why investors are afraid that Wall Street's 'fear index' may be too low

To be sure, the stock market remained surprisingly calm in August, with the Cboe Volatility Index VIX - also known as the VIX, or Wall Street's "fear gauge" - on Thursday tumbling to its lowest level of the year. The VIX fell 7.8% last month, according to FactSet.

This low-volatility market backdrop may represent "the calm before the storm," said Turnquist. The chart below shows the VIX has historically advanced going into the fall, with a high-water mark for the year typically reached in late September or early October.

SOURCE: LPL RESEARCH, BLOOMBERG

"Considering the relatively low starting point of the so-called fear gauge right now, we don't think it is a bold call to suggest there is upside risk to the VIX," Turnquist noted.

U.S. stocks finished lower on Friday after July's personal-consumption expenditures index - the Fed's preferred inflation gauge - showed persistent price pressures tied to higher tariffs.

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-01-25 1751ET