September Woes

October 03, 2023


  • September's historical weakness in the stock market continued this year, with significant declines in various asset classes, including U.S. stocks, international stocks, U.S. small-cap stocks, and U.S. investment-grade bonds.
  • The recent Federal Reserve decision to maintain its benchmark interest rate and a shift in Fed officials' expectations regarding future rate cuts have introduced uncertainty and impacted market sentiment.
  • Inflation has been on the rise, driven by factors such as energy price increases and geopolitical tensions affecting oil supplies, potentially complicating the Federal Reserve's target of reaching a 2% inflation rate.
  • Despite September's challenges, historical data shows that it hasn't translated into fourth-quarter misfortune in recent years, with the fourth quarter experiencing strong gains. Maintaining a long-term perspective in the face of potential economic challenges is crucial for investors.

We have been delving into the topic of stock market seasonality in recent months, and now that September—historically one of the least favorable months—has passed, let's take a closer look. As the chart below illustrates, September has consistently been a source of anxiety for investors. Going all the way back to 1928, it stands out as the month that has consistently yielded the poorest returns for investors.

Unsurprisingly, it has lived up to its expectation this year, with the U.S. stock market, as represented by the S&P 500 Index, down an ugly -4.87% for the month. Not many other assets were spared either. International stocks dropped -3.16%, U.S. small cap stocks fell -6.03%, and even U.S. investment grade bonds tumbled -2.54%.1

September's historical weakness on the calendar has puzzled experts, with various theories attempting to explain this anomaly. Some attribute it to tax loss selling, while others suggest that investors tend to make significant portfolio changes as summer comes to a close. Pinpointing a single cause is challenging, but for September this year, a handful of key factors contributed to a decline in assets.

Interest Rates

If you've been tracking this year's financial journey, it's been akin to a roller-coaster ride for interest rates. We've steadily ascended, inching higher and higher, all the while anticipating the nerve-racking drop that inevitably lies ahead. Moreover, when the drop comes, will it be because inflation was contained and there was a soft landing engineered, or because demand was quelled too far too fast due to the higher burden placed on businesses and households? It’s tough to say, but the latest Federal Open Market Committee (FOMC) decision provides some insight.

On September 20th, the Federal Reserve kept its benchmark interest rate steady, implying that borrowing rates will likely remain higher for a longer period of time. While the market anticipated this decision and the possibility of another 0.25% raise in 2023, the significant surprise was a shift in the number of Fed officials who predict less easing next year than they did in June.

This resetting of expectations surrounding the benchmark rate drove investor fear, ultimately causing a Fed hangover for assets priced for more interest rate cuts in 2024.


Just as the weather has started to cool down, inflation has been picking up. The latest headline inflation figure released for the month of August showed a pickup in month-on-month inflation (+0.63), largely attributable to energy prices.2 Geo-political wrangling around oil supplies caused by Saudi Arabia and Russia has led to upward pressure on pump prices, likely to be felt by consumers soon enough; however, the core personal consumption expenditures price index, which strips out the food and energy components, only climbed 0.1% month-on-month in August, according to the Bureau of Economic Analysis. This is a key gauge watched intently by the Fed, but reaching their 2% target may be more challenging than initially anticipated, and it's possible that investors are growing impatient.

A Pothole, Not a Ditch

September has proven to be a rough month for the past three years, and this year followed suit. But here's the silver lining: September's woes didn't translate to fourth-quarter misfortune in those same years. In fact, the fourth quarter saw robust gains of 11.7%, 10.7%, and 7% in 2020, '21, and '22, respectively.

Even though there are some potential potholes ahead that could slow down economic growth—the end of the student loan moratorium, the autoworker strike, and tightening financial conditions—we don’t believe we’re in a ditch. These anticipated shocks may not be large enough to move the dial.

Whether the U.S. economy experiences a gentle or turbulent descent, it's essential to maintain a steadfast long-term perspective.

  1. International stocks are represented by the MSCI ACWI ex USA NR Index, U.S. small cap stocks are represented by the Russell 2000 Index, and U.S. investment grade bonds are represented by the Bloomberg US Agg Bond Index.
  2. Bureau of Labor Statistics.

Disclaimers and Disclosures