Trading September's Myth: Can this September Be Different?

Despite September's reputation as the worst-performing month for stocks since 1950, current market breadth divergence and potential Federal Reserve rate cuts suggest 2025 might break this historical pattern.

TL;DR

• Since 1950, the average return for the S&P 500 during September is approximately -0.5%, making it the only month that has consistently posted a loss.

• 2025's September might differ due to diverging market breadth signals, potential Federal Reserve rate cuts, and unique economic conditions.

• Traders may want to monitor breadth indicators and Fed policy decisions rather than relying solely on seasonal patterns.

The Historical September Curse:

September has built up a bad reputation over many years because it often doesn’t do well for the stock market.

The reason behind this is called the "September Effect," but there isn’t one single clear explanation.

September is also a considerable time for government decisions, especially in the U.S., where the federal fiscal year ends on 30 September. Arguments about budgets and financial plans often create uncertainty in the market during this time.

2025's Different Market Dynamics: Breadth Tells a New Story

As markets closed in August 2025, several signs might suggest that September 2025 could differ from past months. The S&P 500 ended on 29 August down -0.67% at 6473.58, but it still managed to have its fourth winning month in a row. More importantly, the broad market index finished the day up 0.32% at 6,501.86 after hitting a new all-time high during the day on 28 August. (Source: CNBC)

However, looking deeper, there may be a worrying sign. Even though the S&P 500 has hit record highs, the average stock in the index is more than 10% below its 52-week peak. This has caused market breadth, which measures how well the market as a whole is doing across all its parts, to drop to its lowest level since 2023.

Market breadth As a Key Signal

If the market breadth, the first-quarter earnings results, and the strength of this rally all point to new all-time highs, then this difference between the overall market and individual stocks is a red flag. Out of the seven main leaders in the market, only three have gone past their 2024 highs: Nvidia, Meta, and Microsoft (Data as of 28 August 2025). This limited group of winners could mean the market is weak and might struggle in September

The Federal Reserve Wild Card: September's Potential Game Changer

The most significant change for September 2025 is the uncertainty about the Fed’s monetary policy. The Fed will decide on interest rates again on 16-17 September 2025, and the market thinks there's an 87% chance they'll lower rates by 0.25%. This change could change how September usually works.

At the Fed's annual meeting in Jackson Hole, Wyoming, Governor Powell said that while the job market seems balanced, it's a strange balance because both the number of people looking for jobs and the number of jobs available are slowing down. This could mean the Fed might step in to help the market if things get worse in September.

Moreover, the inflation situation is also tricky. The Core PCE, which is the main measure the Fed uses for inflation, went down from over 5.5% in 2022 to 2.7% in May. Even though it's still higher than the 2% target, this trend might give the Fed a reason to cut rates if the economy struggles.

Trading the September Paradox: What Traders Could Watch

For traders in September 2025, here are some important things to keep an eye on:

1. Advance-Decline Line Divergence: Look closely at the NYSE and Nasdaq advance-decline lines. These lines have been going down since reaching a high in November 2024. It might signal a bearish trend if they continue to drop in September.

1. Sector Rotation Signals: By late May, 86% of tech stocks were above their 50-day moving average, showing strong momentum. However, this might not last. Traders may want to keep an eye out for shifting to more defensive sectors as a possible sign of change.

1. Volatility Indicators: September is usually a month with higher market swings. Traders might want to use strategies that take advantage of this volatility or hedge their positions to protect their positions as the month approaches.

1. Federal Reserve Communications: The September FOMC meeting could be a big moment. While many investors think a 25 basis point rate cut is likely, some Fed members are still unsure.

The Bottom Line: Different Factors, Potentially Different Outcomes?

While only time will tell what actually lies ahead, September 2025 may be a month that breaks from past patterns in some important ways. Even though September has been the worst month for the S&P 500, Dow, and Nasdaq since 1950, things right now make us think we should be careful, not overly worried.

There are a few reasons why September might not go as usual. The market isn't showing a clear direction across all parts of it; the Federal Reserve might take action, and companies have a lot of goods sitting around that could affect sales. These factors make it hard to predict what will happen in September.

Past performance does not guarantee future results. The above are only projections and should not be taken as investment advice.