Stocks Have Had Their Worst Start to September in 70 Years. Can They Rebound?

September has so far lived up to its reputation as the worst month for stocks. 

The S&P 500 last week tumbled more than 4% in its worst week since the banking crisis of March 2023 as fears about the health of the economy weighed on sentiment and raised concerns about the path ahead for interest rates. 

The Nasdaq Composite, weighed down by chip stocks, lost nearly 6% last week, its worst stretch since January 2022. AI semiconductor leader Nvidia (NVDA) shed nearly 14% over the Labor Day-shortened week. Broadcom (AVGO) tumbled 16% after a mixed earnings report.

The (First Week of) September Effect?

While the September Effect, which refers to stocks’ historical underperformance during the month, is more of an unfortunate coincidence than a causal phenomenon, the last four Septembers have been punishing for investors. The S&P 500 declined in each of them, dropping 4.9% in 2023, 9.3% in 2022, 4.8% in 2021, and 3.9% in 2020.

And after last week—the worst start to a September since at least 1953, according to an analysis by Bespoke Investment Group—investors couldn’t be faulted for feeling downbeat. (The 500-member version of the index was introduced in 1957.) A disastrous start to September has, historically, not been a good sign for the market, according to Bespoke’s analysis. 

Setting aside the past four years, Bespoke found, the S&P 500 has fallen at least 2.5% in the first week of September four other times. In those cases, the benchmark index fell further three times.

In two of those four years, the S&P 500 rebounded between the first week of September and the end of the year, gaining 5.7% in 2001 and 6.4% in 2015. But, in the two years in which the index continued to decline, it fell precipitously: 22% in 1987 and 27.3% in 2008.

Why Are Markets So Anxious?

At the moment, there’s plenty for investors to be antsy about. In each of the last five monthly jobs reports, the previous month’s numbers were revised lower. Plus, late last month, the Labor Department estimated that the U.S. added 800,000 fewer jobs in the 12 months through March than previously forecast.

That data has contributed to a steepening of the Treasury yield curve, which last week returned to its normal state after more than two years of inversion. The inverted yield curve is often seen as a recession indicator, but many have recently pointed out that downturns tend to follow closely behind the curve’s steepening into a positive slope, not its initial inversion. 

And there’s little on the horizon in terms of positive catalysts for the stock market. The next round of earnings reports won’t start until mid-October, while a contentious presidential election will loom over markets at least until early November. 

Interest rate cuts, which markets are certain the Federal Reserve will begin this month, may be largely priced in. A majority of traders are betting the Fed will cut rates by one percentage point or more by the end of the year, implying a 50 basis-point cut during at least one of its three remaining meetings. A cut of that magnitude would be the largest by any major central bank this year.

Reasons for Optimism

Investors could, however, look to more recent history for reasons to be optimistic.

September’s ugly start in many ways resembled that of August, when disappointing labor market data sparked concern that the Fed had waited too long to start cutting interest rates and risked pushing the economy into recession. That scene played out again on Friday after the Labor Department revised July’s jobs numbers lower and reported the U.S. added fewer jobs than expected last month.

Wall Street also, as in late July and early August, hasn’t been heartened by key tech earnings reports lately. Nvidia’s stock has declined about 15% since its good, but perhaps not good enough, quarterly report at the end of August. Similarly severe responses to earnings from tech giants Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN), added to the turbulence at the end of July.

And yet, despite August’s volatile start, the month ended up being positive for stocks: Equities went from having their worst week of the year to having their best as labor market concerns ebbed and corporate earnings reports showed profits growing at their fastest pace in years.

As Deutsche Bank analyst Henry Allen noted on Monday, last week’s turmoil was amplified by big tech’s particularly poor performance.

And the economy has repeatedly defied expectations in the last few years, leading some experts to question the predictive power of recession indicators in the post-Covid economy.