Value stocks aim to sidestep concerns about the “September Effect” following a year of inconsistent performance.

The September‌ Effect: Will History Repeat Itself in 2023?

For the last century, September has typically been the ​worst-performing month in‍ the U.S. stock market, with investors ⁣referring to this time of the year as the ‌”September Effect.” From 1918 to 2022, the S&P 500 index has recorded an average decline in September, ⁣although‌ some years ​have ⁤been⁣ better than others.

“September has been quietly consistent: the S&P 500 has lost an average of ⁣1.1% in that month across years dating back to 1928,” said Jan Szilagyi,⁢ the founder of‍ investment research firm Toggle AI, in⁣ a research note.

“February and May … are marginally negative, but September‍ is solidly painful. It isn’t just‌ a few bad years dragging down returns: The S&P 500 has risen less than 45% of the‌ time​ over that period, making September the ​worst month⁤ on that metric,​ too.”

So, what is the ⁣outlook for September 2023?

“Statistically speaking, not great,” Mr. Szilagyi added.⁤ “S&P 500 is trading at 19.4 times forward PE estimates, very high relative to history. Inflated valuations alone don’t cause stocks ⁢to drop, ⁤but they can provide​ a pretty good guide of how ⁤far ‍the stocks could drop.”

Traders positioned in value stocks are hoping that 2023 will avoid the September Effect, as this corner of the equities arena has been mixed all year.

Value ⁣stocks are publicly traded companies with lower share prices ⁢than‌ the performance of their underlying ‍fundamentals. Some of the most notable names are JPMorgan Chase, Nike, and​ Walmart. The counterpart is ‌growth stocks, firms that are anticipated to expand sales and earnings at a faster ⁤pace than the market average. This generally includes top juggernauts ⁢like Apple,⁢ Nvidia, and Tesla.

The Morningstar US Value Index has struggled for most of⁢ the year, kicking off 2023 with a 4.29 percent‍ gain and then only recovering in June ‌and July. In August, the index tumbled nearly ⁢4 percent.

By comparison, the Morningstar US Growth Index has performed well for most of the year. In January, it soared close to 11 percent and then posted significant gains ⁤in March, ​May, June, ‍and July. ⁤Last month, the index plummeted ‍nearly 6 percent.

Value stocks have⁤ generally found it hard to keep up with‌ growth stocks, which have ⁢been ‍fueled by the monster rally in the “Magnificent‍ Seven” ​stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, ‌and Tesla). Indeed, value stocks have been ⁢marketed as ⁣less risky investment vehicles since the companies are already ‍established and provide steady dividend payments, ⁣while growth is ‌viewed as an opportunity to maximize your capital returns.

Looking ahead, ⁣value is ​poised to outperform⁤ growth this year, Vanguard says.

Bank analysts, using the Vanguard⁢ Capital Markets Model® (VCMM), project ⁢that U.S. ​value stocks will offer returns‌ of between 4.6 percent and 6.6 percent.⁢ Growth is only expected to deliver ⁤a return ⁣of between ​0.8 percent and 2.8 percent.

Vanguard also recently raised‌ its outlook on the Fed’s policy rate,‌ forecasting that the ⁤Fed funds rate⁣ could climb as ⁣high as 6.25 percent to finish the year.⁤ However, ⁢the⁤ futures‌ market expects the ‍Federal Open Market Committee (FOMC) ‌to leave the policy rate ‌in the target range of 5 percent‌ and 5.25 ⁣percent, with rate ‍cuts sometime in‌ spring 2024, according to the ‍ CME FedWatch Tool.

Fed ⁣Chair Jerome Powell warned in his keynote address at the Jackson Hole economic symposium that the central bank⁣ could ⁣keep raising‌ rates because inflation is “too⁤ high.”

Either way, the upward movement in interest ⁣rates has⁤ been a boon for other assets, particularly money markets and‌ Treasury ⁢securities.

Rise of the Money Markets

But if value investors are‍ searching for safe bets in the stock market, they⁤ might also be turning ‌to money​ markets—cash‍ investments that maintain short maturities—and⁢ Treasurys.

Since March 2022, the Federal Reserve has raised interest rates by ​500 basis‌ points ⁣to their highest levels in more than two decades. As a result, when individuals‌ and companies are taking advantage of cash ⁤investments, they​ are ⁣earning 5 percent guaranteed ‌returns.

Yields on Treasurys ranging from 1 month to 1⁢ year are returning more than 5 percent. The 2-year yield is‌ also inching ⁢toward the 5 percent⁤ mark. But even long-term Treasury securities are offering holders more than⁤ 4 percent.

The⁣ average savings account…