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September Calendar With Stocks Graphic Behind It
Money; Shutterstock

Leaves aren't the only thing falling in September.

The first month of autumn has historically been the worst month of the year for stocks. The S&P 500, a benchmark index viewed as an indicator for how the stock market is faring overall, has fallen a median of 0.42% and seen positive returns just 44.7% of the time in September since 1928, according to data from Bespoke Investment Group.

As for 2022, stocks have had a rough year so far amid soaring inflation and the Federal Reserve raising interest rates. The S&P 500 is down around 18% from the beginning of 2022. And when the index has been down year-to-date through the end of August, it's averaged a decline of 3.4% in September, according to Bespoke. When the index was up year-to-date during the same time period, September has historically been flat.

The index was trading down 1% by midday Thursday, the first day of September.

Does that mean the stock market will struggle the rest of the month? Not necessarily. Here's what investors should know about how stocks have behaved this time of year in the past, and what to expect for the rest of 2022.

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Why is September a bad month for stocks?

There are several theories behind the "September Effect." Sam Stovall, chief investment strategist at CFRA Research, offers some potential explanations.

For one thing, investors get back into the markets full swing in September following a summertime lull, and their refreshed analyses likely cause them to make adjustments to their portfolios, Stovall says. Businesses also begin the budgeting process for the upcoming calendar year and think about slashing costs by dropping services.

Likely the most influential possible factor, he says, is that most mutual funds end their fiscal years at the end of the month and use September to dump losing positions so as not to look bad when reporting holdings to shareholders.

It could also be psychological: Stocks may tumble in September because investors believe they will, and so they sell shares and prices drop, according to J.P. Morgan Wealth Management. It may be somewhat of a self-fulfilling prophecy.

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What can investors expect next in the stock market?

In the past, when the S&P 500 has entered September down for the year, it's averaged a loss of 1.2% for the rest of the year, according to Bespoke. (When entering the month up for the year, the index has averaged a gain of 3.3%.)

History also shows us how stocks tend to act during the month itself: Since 1983, the first part of the month has traditionally been uneventful, stocks rally in the middle of September, and from then on stocks have steadily traded lower to the beginning of October, Bespoke found.

Of course, we can't rely on the past to know how stocks will behave in the future — and all eyes are on the Fed to determine which direction stocks may move going forward.

While investors got some relief during a rally this summer that helped stocks recoup some of their losses, market experts predict volatility will continue following Fed Chair Jerome Powell's speech last week indicating more rate hikes are on the horizon. The central bank raises rates when economic activity needs cooling (a.k.a. inflation is high, like now), but those rate hikes can also lower prices for financial assets like stocks.

What should investors do now?

As hard as it may be, the best move is likely no move at all.

"An investor should not change their investment strategy purely to avoid losses associated with a certain season," says Justin McCurdy, an executive director and financial advisor at Manhattan West, an investment management firm based in Los Angeles.

Financial advisors recommend an investment strategy aligned with your goals, risk tolerance and timeline. That means having a diversified portfolio that can help you weather the ups and downs you may see in the coming months, not buying and selling based on the news or short-term volatility.

Portfolio changes should be made if your current strategy is no longer suitable, McCurdy says, and not because of seasonal anomalies that may or may not actually occur in a given year.

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