Will September prove another stinker for global stock markets?

A bright start to August gave way to gloom through the second half of the month. We explain why and discuss what might happen to stock markets in September.

Investors were full of summer optimism as August began, and if you’d stopped the clock after a couple of weeks it would have been a decent month. Of course, you can’t. Instead, after hitting a 10-week high, share prices deflated quicker than a burst lilo.

At the end of the session on Tuesday 30 August, only markets in India and Japan had posted gains for August. The FTSE 100 was down 0.8% and the FTSE All-Share 1.5%. But the FTSE 250 mid-cap index tumbled 5%, dragged lower by a 35% decline at XP Power (LSE:XPP) following a profits warning on 1 August, plus losses of over 30% at Marshalls (LSE:MSLH) and ASOS (LSE:ASC).

It was similar on Wall Street, where the Dow Jones, S&P 500 and Nasdaq Composite lost 3.2%, 3.5% and 4.1% respectively. Salesforce Inc (NYSE:CRM), 3M and Intel (NASDAQ:INTC) all registered double-digit percentage losses.

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None of the causes are new. Global central banks must keep raising interest rates to try and bring runaway inflation under control. Biggest influence on sentiment is, of course, the US, and the head of the Federal Reserve Jerome Powell did stock prices no favours in a speech delivered at the annual Jackson Hole economic conference in Wyoming.

He dismissed the notion that interest rates had likely peaked, instead warning that the cost of borrowing would have to go much higher and that this would bring inevitable economic consequences. Powell said:

“While higher interest rates, slower growth, and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

“Restoring price stability will likely require maintaining a restrictive policy stance for some time.”

Higher interest rates are especially bad news for so-called growth stocks as they increase the cost of growth – borrowing money to finance future expansion and cash flows becomes more expensive. It’s hard for all companies, but many growth stocks do not have the established and reliable income streams that you see in more traditional industries such as oil, mining, banking and tobacco.

What will happen to stocks in September?

September has a bad reputation among stock market watchers. History buffs will remember the Black Wednesday crash of 1992 when the British government withdrew the pound from the European Exchange Rate Mechanism. 9/11 caused stock prices to plunge, while September 2008 marked another low point during the financial crisis.

Even when the falls are not spectacular, they are regular enough to make September statistically the worst month for stocks.

Indeed, according to The UK Stock Market Almanac, the FTSE All-Share index saw an average return of –1.2% between 1970 and 2017. Around half of years saw a positive return in the month.

Since year 2000, performance in September has been even worse, with an average return of -1.6%.

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September 2018 and 2019 saw the All-Share index rise 0.53% and 2.7% respectively, while 2020 and 2021 registered declines of 1.8% and 1.2%.

Share price volatility is at its highest annual point in September, so what will happen in 2022?

There is some speculation among optimists that 2022 will bring a better September given a lot of pessimism is already baked into share prices. They point out that de-risking typically occurs at this time of year as institutional investors returning from their summer holidays respond to second-quarter earnings downgrades. But they argue that de-risking has already happened because of rising inflation and rate speculation earlier this year. We’ll see.

September 2022 starts with a bang as investors prepare for the big jobs data on Friday 2 September. US non-farm payrolls are expected to have added 285,000 jobs.

Later in the month, the Federal Reserve holds its rate setting meeting. After back-to-back 75 basis point rate hikes in June and July, there’s a strong chance it will be three in a row this month. However, policymakers say the size of the increase at the September 20-21 meeting will depend on the data and expectations of where rates need to be by the end of 2022.