Will September be worst month of the year for shares again?

Past performance meant August - where odds of a positive return were little better than 50:50 - began with low expectations, and investors were right to be pessimistic. 

A year ago, it was high inflation and interest rates that caused a sharp decline on most major stock markets. It’s little different a year later, although now we have added speculation about a possible recession later this year. Much will depend on whether global central banks have made the right moves at the right time. 

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Every set of data is important right now, but few more so than US inflation numbers and the monthly jobs report, given both shed light on the effectiveness or otherwise of central bank policy in the world’s largest economy. 

Latest inflation data came in pretty much as expected. Thursday’s Personal Consumption Expenditures (PCE) index showed prices rose 0.2% on a monthly basis and 3.3% year-on-year. Core PCE, which strips out volatile food and energy prices, increased by 0.2% month-on-month and 4.2% for the year. Non-farm payrolls are released the afternoon of Friday 1 September.

Problems in China are a worry too. A lacklustre economy and fears of weaker demand for raw materials have affected global commodity stocks, while there are major concerns about the country’s property sector where defaults remain a real possibility. Further stimulus measures may be needed to revive consumer demand and tackle high youth unemployment.

Not a single major market index managed gains in August. Switzerland and the Nasdaq 100 tied for first place, limiting losses to 1.62%, followed closely by the Japanese Nikkei. The FTSE 100 fell 3.4% and the FTSE All-Share only slightly less. Plenty of stocks fell 20% or more, among them Capita (LSE:CPI), TUI AG (LSE:TUI) and Watches of Switzerland Group (LSE:WOSG). FTSE 100 miners like Endeavour Mining (LSE:EDV), Antofagasta (LSE:ANTO) and Glencore (LSE:GLEN) lost at least 10% because of China.

On Wall Street, the S&P 500 fell 1.8%, the Nasdaq Composite 2.2% and the Dow Jones 2.4%. Even many of 2023’s favourite tech stocks gave up ground last month, although they still boast significant gains for the year so far. Meta Platforms Inc Class A (NASDAQ:META) fell 7%, Apple Inc (NASDAQ:AAPL) 4.4%, Tesla Inc (NASDAQ:TSLA) 3.5% and Microsoft Corp (NASDAQ:MSFT) 2.4%.

Another miserable September?

An old City adage encourages investors to sell in May and return on St Leger Day in September. It was a sensible tactic when wealthy City workers would spend the summer touring sporting events like Wimbledon, the cricket and Henley Regatta. But times have changed and, while most still take an annual two-week break, there are plenty who remain glued to their trading screens during the holiday period.

This year, the St Leger horse race at Doncaster, the last of Britain’s five Classic races, falls on Saturday 16 September. So far, following the adage this year would have paid off, with most major global stock markets performing poorly since the end of May. Apart from the US indices, Japan, Brazil and India, everywhere else is lower. The FTSE 100 has lost 5%, the FTSE All-Share 4.9%, and UK smaller companies struggled again, with the AIM All-Share index down 10.6%.

But investors who do follow the adage and come back in a few weeks’ time cannot be guaranteed a warm welcome.

• Positive outlook for UK bank sector dividends
• Will interest rates really peak in September?

September has a poor reputation for stock market returns. In fact, it is statistically the worst month for stocks and when volatility is at its highest.

That was demonstrated perfectly in 2022 when the FTSE 100’s 5.4% decline was considered one of the best performances. Few did better. The S&P 500 tumbled over 9% and the Nasdaq Composite 10.5%.

Over the past 10 years, the FTSE All Share has fallen seven times and is down in each of the past three years. Last year, the index fell 6.09%, its worst performance since 2008.

There’s no easy explanation for the disappointing display. Some believe that influential investors returning from their summer breaks may decide to sell stocks they’d been planning to offload before the summer. Others say that US mutual funds with September year-ends sell losing positions. Maybe big decision makers take a little longer to get up and running and decide strategy after the holidays. 

This year, global central banks will undoubtedly have a significant influence on share price direction, as investors look for clues that interest rates really have peaked. 

• Interest rates rise to 5.25%: what does this mean for me?
• Benstead on bonds: why interest rate cuts aren't coming soon

Watch out for the Federal Reserve’s rate decision on 20 September when policymakers are expected to keep borrowing costs unchanged. A day later, the Bank of England is tipped to raise rates by a quarter percent in what could mark the peak in this rate hike cycle. Economists are unsure what the European Central Bank will do when it meets on the 14th.