by Jack Fischer.
The September Effect is a market anomaly where major markets (both U.S. and ex-U.S.) underperform during September as compared to the rest of the year. The anomaly is thought to be unrelated to any individual market impact, event, or news. Participants have a range of theories that are not limited to: investors choosing to realize gains as the summer comes to an end, funds choosing to take advantage of tax-loss harvesting as the end of the year approaches, as well as the September Effect even becoming a self-fulfilling prophecy.
To give a sense of the underperformance, we pulled the September monthly returns for the DJIA and S&P 500 dating back to 2000. In those 21 monthly periods, the DJIA produced 11 negative monthly returns, while the S&P 500 compiled 10. The average of the 21 September returns dating back to 2000 for both the DJIA (-0.9%) and S&P 500 (-1.0%) represents the lowest average monthly returns in the calendar. Better put, on average September records the lowest returns for each index throughout the calendar year. Despite this year’s market gains, September 2021 is on pace to add yet another negative monthly return to our data set—DJIA (-1.72%) and S&P 500 (-1.08%) since the start of the month.
What does this mean for fund flows? We looked at monthly estimated net flows for the four macro-groups—equity funds, taxable bonds funds, municipal bond funds, and money market funds. In each macro-group, the average September flow since 2000 was lower than the total average monthly flow. December, on average, has suffered the most outflows for equity funds, taxable bond funds, and municipal bond funds for obvious reasons. The average September outflows (another popular fiscal year-end for many funds) were the third largest among equity funds and money market funds. The average net inflows during September for taxable bond funds and municipal bond funds rank fifth and sixth lowest, respectively, among all calendar months.
The September Effect does appear to have consequences for equity and money market funds. So far this month, both macro-groups are trailing their 2021 monthly flow average. Equity funds are on pace to log their second-lowest monthly inflows of the year, while money market funds are more than likely going to realize their second-largest monthly outflow of the year. Money market funds observed the largest weekly outflow of the year this past week (check out more weekly trends here).
Using only weekly fund flow reporters, Lipper Large-Cap Growth Funds (-$4.3 billion) have suffered the largest month-to-date outflows for equity Lipper classifications. Lipper Institutional U.S. Government Money Market Funds (-$47.1 billion) have seen the most money leave since the start of the month under Lipper money market classifications. It will be interesting to see how the rest of September shakes out and if equity funds and money market funds will start seeing significant inflows again, like their October and November historical averages suggest.
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