The "September effect" is an odd phenomenon in which the stock market generally declines during the month of September, often quite sharply. Dating back to 1928, the benchmark S&P 500 has lost an average of 1.1% during September, making it the worst month for the stock market by a full percentage point.
The September effect could be particularly chilling this year due to a confluence of important events. The inflation report slated for Sept. 13 and the conclusion of the Federal Open Market Committee meeting on Sept. 20 could send stocks into a tailspin. But those events could just as easily buoy the S&P 500 into a new bull market.
Here are the important details.
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Sept. 13: The Labor Department will release the August CPI report
The Labor Department is scheduled to publish its Consumer Price Index (CPI) report for August bright and early on Wednesday, Sept. 13. The CPI is a common measure of inflation and, while the Federal Reserve prefers the price index for Personal Consumption Expenditures, officials will undoubtedly scrutinize the August CPI report for insight into how pricing pressures are trending across the economy.
Here's a recap of the last few years: The CPI first exceeded the 2% target in March 2021, and it reached a four-decade high in early 2022. Fed policymakers responded with the most aggressive series of interest rate hikes since the early 1980s, a decision that spooked Wall Street and sent the S&P 500 tumbling deep into bear market territory. But after peaking at 9.1% in June 2022, the CPI declined for 12 consecutive months as tighter credit conditions began to blunt pricing pressure. That streak ended last month, when the CPI ticked 20 basis points higher to 3.2%.
US Inflation Rate data by YCharts
That context explains why the August CPI report is particularly momentous. Will inflation continue to reaccelerate, or was last month a fluke? The answer will undoubtedly factor into any policy decisions made by the Federal Open Market Committee (FOMC) at its upcoming meeting.
Sept. 20: The Federal Open Market Committee will conclude its meeting
The Fed has increased its benchmark federal funds rate to a 22-year high, but the futures market is signaling an end to the current rate hike cycle, according to CME Group's FedWatch Tool. In other words, derivatives investors are betting that the Fed will leave rates unchanged from here on out. But Fed Chair Jerome Powell recently warned that inflation was still too high, and he said policymakers were "prepared to raise rates further if appropriate."
If the August CPI report shows that inflation accelerated last month, policymakers will likely raise rates at the next FOMC meeting, a two-day event that concludes on Sept. 20. That could mean trouble for the stock market. Interest rates have risen quite quickly, and changes in monetary policy take time to reach full effect, so increasing rates further before past hikes have been fully digested could unintentionally choke the economy into a recession. In turn, that would put pressure on corporate revenue and profits, which would ultimately drive stocks lower.
Alternatively, if the August CPI report shows that inflation slowed last month, policymakers might take a pass at the next meeting, or even discontinue rate hikes altogether. That could propel the stock market much higher.
The S&P 500 could skyrocket when the Fed stops raising rates
The FOMC has led six other rate hike cycles since 1988, and the S&P 500 returned an average of 23.7% during the 12 months following those cycles. In other words, history says the stock market could climb almost 24% during the year following the Fed's decision to discontinue rate hikes.
Gains of that magnitude are always compelling, but they are particularly compelling here because they would drive the S&P 500 into bull market territory. The index is currently 6% off its all-time high, the definitive threshold for a new bull market, so adding 24% would easily push it beyond that mark. So what? The S&P 500 returned an average of 186% during the last nine bull markets, meaning many stocks will skyrocket during the next one.
Here's the bottom line: Investors should pay attention to the August CPI report on Sept. 13 and the FOMC meeting on Sept. 20. For better or worse, both events could impact the stock market in a big way.
