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September Suffering

Last week we briefly touched on the September Effect. It is the phenomenon that has caused the ninth month to have the lowest average returns. This post expands on that and provides a few visuals.

Since 1987, the Russell 1000 experienced a negative September return in 17 years. The Russell 2000 was negative 14 times. Both indices were negative in the past two Septembers. The best year was 2010 when the Russell 1000 returned 9.2% and the Russell 2000 returned 12.5%. There have been some positive streaks as well. From 1995 to 1998 each index enjoyed positive September returns. The Russell 2000 was essentially flat in 1999. After a poor start to the 1990s (R2K declined 8.8% that year), the Russell 2000 was only negative for one September during the decade, and it was just -0.3%.

September monthly returns for Russell 1000 and Russell 2000 from 1987-2021

Source: Jackson Creek Investment Advisors; S&P Global

Next is a shorter-term look at how September fits into the rest of the annual returns. Below is a table showing the returns from 2000 through August of this year. Each year (except 2022) is broken down into the eight months from Jan-Aug, September only, and then the full year (not just the fourth quarter).

Table of annual returns for Russell 1000 and Russell 2000 broken down by YTD-Aug, September, and the full year

Source: Jackson Creek Investment Advisors; S&P Global

Since the turn of the century, there have been six years where the Russell 1000 was negative at the end of August, excluding this year. Of those six years, September posted a positive return only once in 2010. The Russell 2000 has seen eight years where the index was negative through August. Two of those years had a positive September. We obviously do not know how this month will end, but if this September is negative, recent trends do not bode well for the remainder of the year.

In the large cap Russell 1000, there were two years since 2000 where year-to-date through August and September were both negative and the index managed a positive return for the year. In 2011 and 2015 the fourth quarter experienced a positive reversal, but those years were less negative than where we are in 2022 and the full year returns were marginally positive.

Chart of annual Russell 1000 returns from 2000 - 2022 with September highlighted

Source: Jackson Creek Investment Advisors; S&P Global

The Russell 2000 also experienced two years of positive returns after negative year-to-date through August followed by a negative September, but the dynamics were a little different. In 2001 after being down only 2.2% through August, the Russell 2000 had the worst September since 1987 with a -13.5% return. The index rallied in the fourth quarter to finish at +2.5%. The other year was 2020. The small cap index was still in negative territory after August and then saw another 3.3% decline in September. The Russell 2000 finished 2020 up 20%.

Chart of annual Russell 2000 returns from 2000 - 2022 with September highlighted

Source: Jackson Creek Investment Advisors; S&P Global

Obviously, we cannot know how this month and year will play out based on past performances. Whatever the underlying reasons for the September Effect, this year has inflation and rising rates, a mid-term election, and a host of other factors. Needless to say, this is just a broader look at recent trends and not a forecast. However, absent a major positive catalyst, it does not look promising for the remainder of the year.



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