May-November Is The Stock Market’s Worst 6-Month Period, But 2022 Could Buck That Trend

Published on

Historically, September has been the worst month for equities, but things could be different this year. In fact, data from CFRA shows that February and September are the only two months that have averaged negative returns for the stock market since 1945.

However, significant de-risking has already occurred this year due to the broad-based equity selloff, so experts suggest the market could buck the so-called “September effect.”

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q2 2022 hedge fund letters, conferences and more


What Is The September Effect?

Citing data from the Stock Trader's Almanac, CNBC reported that the averages of major stock indices are the weakest in September, with all three major indices in the red for most Septembers. As a result, many market watchers have dubbed this trend of weak equity performance for the month the "September effect."

Interestingly, the September effect appears to get less attention than the adage, "Sell in May and go away." However, the two months' weak performances could be related. In May, many investors unload some positions, potentially as they get ready for summer vacation.

Data from the Stock Trader's Almanac reveals that the best-performing six-month rolling period, on average, is November through April. On the other hand, the worst-performing six-month period is May to November.

Sell In May And Go Away? Here's Why

Like how May's weakness may be related to the calendar, the theory around the September effect is that investors return from their summer vacations in September and decide to lock in gains for the year by selling some stocks. Another potential factor for the trend is that families need money to buy school supplies or pay tuition, so they sell stocks to get that money.

Additionally, September usually kicks off the period when mutual funds start paying distributions to investors. As a result, they may start selling some stocks to pay for those distributions.

Although those factors could play roles in the September effect, CNBC suggests that the real culprit behind it could be more technical. At the beginning of the year, sell-side analysts are usually quite optimistic.

As a result, they usually slash their earnings estimates as the year goes on, usually following the second-quarter earnings season in August. It makes sense that the downgrades in August would pull stocks down the next month, causing many institutional investors to de-risk their positions in response.

Due to the stock market's weak performance, as evidenced by the S&P 500's 18% year-to-date plunge, many analysts expect this September to repeat the historical trend. However, others aren't so convinced.

Bucking The Trend?

With all three major indices in the red, significant de-risking has already occurred across the market. As a result, institutional investors might be less inclined to sell in September. Additionally, when the sell-side finishes its earnings downgrades, many stocks will look even cheaper, which could trigger a wave of buying by institutional investors.

CNBC pointed to the semiconductor industry as evidence of this dynamic already playing out. Micron Technology, Inc. (NASDAQ:MU) gave lower-than-expected guidance when it reported earnings on June 30. As a result, analysts slashed their estimates for the company by almost 60%.

Despite that, Micron shares surged more than 18% between July 1 and Aug. 4. Since the stock had already plummeted earlier in the year, analysts' downward revisions suggested to investors that Micron had already been de-risked, making it prime for the picking.

However, it's important to note that Micron shares have reversed course again, falling 9% over the last 30 days. There's no free lunch on Wall Street.

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!