Stock markets, like life, have their quirks—and one of their most notorious oddities is the “September Effect.” Even though summer vacation is supposedly over after Labor Day, stocks languish as if they missed the memo.

While long-term stock performance is ultimately driven by economic fundamentals, certain patterns emerge when examining the behavior of markets over time.

One of the most well-known of these patterns is the September Effect, a phenomenon where stocks tend to perform poorly during the month of September. Last week’s sharp decline of the main U.S. stock market indices seems to be a harbinger of the effect.

Historical data supports this curious pattern, showing that September has been one of the weakest months for the S&P 500. Since 1945, the S&P 500 has declined by an average of about 0.6% during this month, with positive returns only occurring half the time.

By comparison, for all other months combined, the average return is roughly 1%, with markets posting gains about 64% of the time.

Despite all this, there are reasons for optimism. Historically, the months of November and December have tended to be particularly strong, with returns positive about 75% of the time, offering a glimmer of hope as we move into the final quarter of the year.

The following chart tells the story:

The reasons behind this seasonal pattern are debated, with no single explanation definitively explaining September’s underperformance. However, the data suggests you should prepare for increased volatility during this period.

October also has a reputation for volatility, though for different reasons. October is often remembered for some of the most significant stock market crashes in history, including the 1929 crash and the Black Monday crash of 1987. This history contributes to October being perceived as a volatile month, even if it doesn’t consistently experience negative returns like September.

There is no direct “spillover” effect from September into October. However, if September has been particularly volatile or weak, this can set a nervous tone for October, which could influence investor behavior.

Historically, after sharp drops in September, October has sometimes seen market recoveries or even continued volatility, depending on the broader economic and market context. That said, past performance does not guarantee future results, and October’s market movements can be shaped by a variety of unpredictable factors.

Why September is a weak month for stocks…

Understanding why September has historically been a weak month for stocks requires delving into investor psychology, economic cycles, and even calendar effects. There are several theories that attempt to explain the persistent underperformance.

Many market participants take vacations during the summer months, leading to lower trading volumes and less liquidity in the market. As September approaches, traders and investors return to the market, which generates increased activity and more selling pressure, as portfolios are rebalanced and profits are taken after summer rallies.

In the U.S., the fiscal year ends on September 30 for many corporations and funds. This can lead to portfolio managers selling off underperforming stocks to harvest tax losses. These sales can contribute to a downward trend in stock prices, particularly in an environment where year-to-date performance has been poor.

As summer transitions to fall, there’s often a shift in sentiment as economic data from the third quarter becomes available. Historically, September is when corporate earnings forecasts are reassessed, and if economic data is weaker than expected, it can lead to lower investor confidence and selling pressure.

The fourth quarter: a time for optimism…

Although September may be challenging, the stock market often rebounds as we head into the fourth quarter, especially during November and December.

The stock market tends to perform well during the holiday season. Investors often become more optimistic about economic prospects and consumer spending increases as the year closes. This boost in consumer confidence can positively impact corporate earnings, which in turn helps drive stock prices higher.

Corporate earnings reports released in October and November often provide a clearer picture of how companies are performing. When earnings meet or exceed expectations, it can create a wave of optimism that propels the market upward.

Many companies also issue forward guidance for the upcoming year during this period, giving investors a glimpse of what to expect and encouraging them to buy into the market before year-end.

While September may see tax-related selling, the fourth quarter often witnesses portfolio rebalancing. Investors who have locked in losses earlier in the year may begin buying again to position their portfolios for the next year. This can create upward pressure on stock prices as demand increases.

Mutual funds, hedge funds, and pension funds also engage in “window dressing” during the final months of the year. This refers to institutional investors making adjustments to their portfolios to reflect positions that performed well, which can give the appearance of stronger performance to clients. This buying activity can also contribute to a year-end rally.

Positioning for the months ahead…

While past performance is never a guarantee of future returns, understanding the seasonal patterns of the stock market can help investors make more informed decisions.

September’s historical underperformance should not be a reason for panic, but rather an opportunity for long-term investors to capitalize on market weakness. By strategically adding to high-quality investments when prices are lower, investors can position themselves to benefit from the potential rebound that typically occurs in the fourth quarter.

While the September-October period has historically been a volatile time for stocks, it’s not a reason to shy away from the market. Instead, you should see it as an opportunity to evaluate your portfolio, capitalize on any short-term weakness, and focus on high-quality investments that are aligned with your long-term goals.

In the meantime, the major U.S. equity averages closed mixed Tuesday as follows:

• DJIA: -0.23%
• S&P 500: +0.45%
• NASDAQ: +0.84%
• Russell 2000: -0.02%

The benchmark 30-year U.S. Treasury yield declined 1.10% to close below the psychological threshold of 4.00%, to settle at 3.95%.

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John Persinos is the editorial director of Investing Daily.

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