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Traders consistently warn of stocks slumping in September -- and are right to do so based on historic data. The S&P 500 has averaged a -0.6% return in September since 1950, while the NASDAQ has dropped 0.9% since 1985. Those are the worst average monthly returns for each index.
Zoom out, however, and the story flips. The S&P 500 has posted an 8% annualized return since 1950 while the NASDAQ returned 11% annualized since 1985. That's why investors are wise to look past seasonal dips and stick with their investments, including the best index funds and exchange-traded funds (ETFs) that track the market, and let compounding do the heavy lifting.
Since 1950, the S&P 500 has posted a -0.6% average return in September, making it the weakest month in the index's calendar. Average September returns since 1980 and 2000 have been worse.
It's not just a few bad Septembers over the decades that have pulled the S&P 500 down. Since 1950, the index has had 41 negative Septembers vs. 34 positive ones.
Aside from September, February is the only other month to average a negative S&P 500 return since 1950, delivering investors -0.03%.
Despite concerns about an October Effect following the September doldrums, October has actually delivered an average return of 0.9% for investors. The months following -- November, December, and January -- have some of the strongest average returns since 1950.
Looking annually, the S&P 500 has delivered an 8% annualized return since 1950, a 9% annualized return since 1980, and a 6% annualized return since 2000 despite Septembers that are sometimes duds. Over the long term, the S&P 500's returns have historically been an unmatched wealth-creation machine.
The NASDAQ isn't immune to the September Effect. In fact, it has performed worse than the S&P 500. Since 1985, the NASDAQ has had an average return of -0.9% in September and has had 18 positive Septembers versus 22 negative ones. Since 2000, the average NASDAQ return in September has been -1.9%, with 12 positive months and 14 negative.
Still, the NASDAQ has posted positive average returns for each month outside of September. Like the S&P 500, the NASDAQ's November, December, and January post particularly strong returns, on average.
Despite rocky Septembers, the NASDAQ's annualized return is an impressive 11.5% since 1985 and 6.8% since 2000. Like the S&P 500, the NASDAQ has been a reliable source of returns over the long term even if September tends to be a down month.
There are a number of theories to explain why stocks suffer in September:
For investors, the data shows a clear takeaway: Short-term seasonality like the September Effect is essentially irrelevant when considering long-term strategy and historical gains from the market. Staying invested through index funds and ETFs is a simple way to keep portfolios aligned with the market's historic long-run growth.