- September has historically been the weakest month for U.S. stock returns, though a few particularly bad years really skew this long-term average.
- With a forward P/E near 22 and the Buffett Indicator over 200%, current levels mirror those seen before market crashes in 2000 and 2021-2022. That's a reason for genuine caution
- Panic-selling, trying to time the market, and piling into popular trades usually backfire.
September often brings bad news for financial markets, with a reputation as the weakest month for stocks. The S&P 500, for instance, has historically seen an average negative return of about 0.8% in September over the past five decades.
After several years of market rallies, driven by huge investments in big tech and AI, some investors are now wondering if this September could spark a bigger market slide. So, is there validity in these views?
Numbers Suggest An Overheated Market
Several indicators point to an overheated market. Valuations look stretched, debt levels are high, and market gains have mostly come from just a few tech and AI companies.
The S&P 500’s current forward price-to-earnings ratio sits around 22. That’s well above its 30-year average of about 17. We saw similar valuations just before the 2021-2022 tech sell-off and the dot-com crash in the late 1990s.
Also, the Buffett Indicator, which compares total market value to GDP, climbed above 200% this year. That level has historically preceded major market corrections, like the one in 2022.
Fund managers’ mood also signals caution. An August Bank of America survey showed cash allocations near record lows, around 3.5% of assets, while equity allocations hit their highest point since November 2021. Bank of America’s model suggests this combination has historically been a contrarian sell signal.
However, unlike past crises, like the dot-com bubble or the 2008 financial crisis, many top companies now have solid profits and strong balance sheets. This means current risks might cause a market adjustment or a dip, not necessarily an immediate, widespread market collapse.
What to Do if Warning Signals Intensify
If market warning signs grow stronger, investors have a few strategies to think about. Don’t panic sell good assets when the market drops sharply because it can lock in losses and make you miss out on recoveries.
Taking on more risk with borrowed money or by making concentrated, speculative bets can really magnify losses when the market gets volatile. Also, chasing after popular stocks might leave you too exposed if market leaders change.
When the market’s overheated, companies that don’t have real profits and just rely on hype usually see the biggest drops. So, it’s smart to put your money into businesses with proven free cash flow.
Finally, trying to perfectly time market highs or lows has almost always been tough for most investors.
The S&P 500 has often seen a negative return, around 1.17%, in September. Historically, it’s ended lower more often than it’s risen.
If markets dip, try not to panic-sell your quality holdings. You should also steer clear of adding leverage, chasing momentum stocks, or trying to time the market precisely during volatile periods.
No. Seasonality and high valuations do raise risks, but September has actually been positive nearly half the time. What’s more, current fundamentals are different from what we saw before past crash periods.