Market Insider

September has the worst track record for stocks but any pullback could be swift as investors watch the election

Key Points
  • September historically has been the worst performing month for stocks, and analysts don't expect that necessarily to be the case this year though the election could create volatility.
  • Analysts expect there could be a slight pullback in September but the momentum from August's big move higher is likely to continue.
  • The market swings its focus to elections after Labor Day, and It could be negative for the market, if polls started to show a strong blue wave with Democrats taking the White House and both houses of Congress.
A man walks a dog in the shade away from the midday sun past the New York Stock Exchange (NYSE) building in Manhattan, during hot weather in New York City, New York, U.S., August 11, 2020.
Mike Segar | Reuters

Stocks often stumble in September, and in election years, there's potential for even more volatility.

The presidential election is a horse race with Democrat Joe Biden now holding a narrower 6.9 percentage point lead, from prior double digits, over President Donald Trump, according to an average of major polls on While the outcome is still unclear, there is less concern than even a few weeks ago is that Democrats will sweep the White House and both houses of Congress in November.

"Labor Day is the point where the polls really start to matter," said Barry Knapp, Ironsides Macroeconomics director of research. "If we were anywhere near they were a month ago, it would be a problem. Here we are a month later and it looks like Trump is going to win again...To me. it looks like the momentum is on Trump's side." Knapp said investors are betting in the derivatives market that there will be a lot more volatility in October and November, than in September.

The Senate is also up for grabs, and there are a number of tight races that could decide control of the Republican dominated Senate. The House is expected to remain in Democratic hands. That makes the first presidential debate on Sept. 29 an important event for the markets should either of the candidates leap ahead enough to provide more momentum for their party in Congressional races.

"I think one of the bigger [events] could be the debate. That could change the poll numbers. I think the market would feel better about either Trump pulling ahead in the polls or the Republicans looking set to take the Senate," said Jim Paulsen, chief investment strategist at Leuthold Group. "I think the vast majority of investors would not be happy that one party could get tri-power and have a free-for-all for two years on what they want to accomplish."

Paulsen said whether the Senate goes Democrat or stays Republican is the bigger deal. "That's still very much in play, and that could be a huge deal for the markets," he said. If the Democrats sweep, investors are concerned that they could raise capital gains and other taxes.

Marko Kolanovic, JPMorgan head global quant, said the course of the market will be driven by Covid-19 and the chances of Trump being re-elected. Kolanovic said Trump's chances are rising. "The impact on sectors and factors (momentum vs value, cyclicals vs tech, ESG) could be dramatic and investment portfolios should adjust for a potential Trump re-election," Kolanovic wrote.

September is often a weak month, and since World War II, the S&P 500 averaged a decline of 0.5%, according to CFRA. August is often a flattish month, but this year it is up about 7%, the best performance since 1984. Analysts said the market could ride August's momentum, but it is getting overbought and could see a quick pullback before moving higher.

"I'd be pretty surprised if we didn't go through September without some sort of risk off event, even if it's only a 5% or 6% move in the S&P," said Knapp. Knapp said if the virus starts to spread again as schools open, particularly in the northeast, that could be a possibly bigger negative.

Paulsen also said a shallow sell off is possible, but just because September is seasonally weak doesn't mean a correction is coming. "Has there been any month that's been right on the seasonals this year?" he said.

Besides the election, September is an eventful month for markets, starting with Friday's August jobs report. The Fed then meets Sept. 15 and 16, and is likely to discuss its new policy of averaging inflation in place of a set 2% target, announced by Fed Chairman Jerome Powell last week. The meeting is expected to be uneventful but dovish.

Tom Block, policy strategist at Fundstrat, said the two big events in Washington in September are the presidential debate and the end of the fiscal year. Congress has to approve a budget before Oct. 1, and Block said there is increasing talk that the next stimulus package could be tied to it. 

Congress has been attempting to negotiate another round of virus-related stimulus spending, but so far Republicans and Democrats are about $1 trillion  apart. Block said the two sides agreed on many components of the package but they still can't find common ground, and tensions could rise around the budget deadline.

Block said if Friday's payrolls number is much weaker than the 1.4 million expected that would have the potential to prod Washington on the stimulus.

Jim Caron, portfolio manager at Morgan Stanley Investment Management, said he expects Congress to come up with a fiscal package and vote on the budget before the the government runs out of money.

The stimulus has been seen as critical by economists since  it provides funds to small businesses and individuals. The package would include more funds for the Payroll Protection Program, or PPP,  which was designed to help small businesses keep workers on their payrolls. The package would provide enhanced unemployment benefits and one-time payments to individuals and families.

"I would say we already reached a fiscal cliff in July. That's when a lot of the PPP started to run out. I think this is going to get done. Nobody wasn't to be blamed for this," said  Caron. "if it doesn't get done, there's a big finger to point there. Usually the party in control, gets most of the blame."'

As for the debate, it could be a turning point for one candidate or the other, and depending on how the Senate races look that could be a big deal.

"Since there's no real in-person campaigning, the debate is going to be one of the most important debates since we had presidential debates in 1960. This is going to be huge. Both have so much at stake," said Block. He said about 90% of voters should have made up their minds so about 10% could be influenced by the debates. There are two others in October.

"Both candidates are capable of major guffaws. The question is who is going to avoid the guffaw," Block said.

Caron said whether Trump or Biden wins is not that much of a difference. He said Trump's policies of de-regulation are business friendly, but Biden will probably increase government spending and that would help the economy. "It's hard to discern positive versus negative. I think the pandemic is going to drive policy. You're going to be battling with the pandemic," Caron said.