Key takeaways
- Historical seasonality suggests the S&P 500 could encounter increased volatility during the second half of September before conditions historically improve later in the year.
- In U.S. midterm election years, September has historically been a weaker month for the S&P 500, although the period from September through year-end has averaged a gain.
- Gold has accelerated following its mid-year pullback, with the direction of the U.S. dollar potentially playing an important role in determining what happens next.
- A long-term indicator for the Russell 2000 has recently turned negative, giving investors another risk signal to watch across U.S. small caps.
- Broader volatility indicators remain mixed, suggesting September weakness could potentially create opportunities rather than signalling a major deterioration in markets.
September has a reputation for giving investors something to worry about, and this year the seasonal signals are once again coming into focus.
In the latest episode of Markets in Motion, StoneCastle Investment Management portfolio manager Bruce Campbell examines what historical September performance could mean for the S&P 500, alongside changing signals in gold, U.S. small caps and market volatility.
This article is being disseminated on behalf of StoneCastle Investment Management, a third-party issuer, and is intended for informational purposes only.
Seasonality data from EquityClock shows that the S&P 500 has historically performed relatively well during the first part of September before weakening during the latter half of the month.
Campbell cautions against treating that pattern as a forecast. He compares seasonality with climate: it tells investors what conditions have historically looked like, but the actual “weather” can vary considerably from one year to another.
What midterm election years tell us
This year also falls within a U.S. midterm election cycle, adding another historical pattern for investors to consider.
Campbell highlights Jones Trading data showing that, on average, the S&P 500 has declined 2% during September in midterm election years. Historically, however, October has been positive, as has the period from November through year-end.
That has also left the broader September-to-year-end period positive on average, suggesting any seasonal weakness could potentially create opportunities rather than necessarily changing the longer-term market trend.
Gold’s rally meets the U.S. dollar
Gold is another market closely following its historical seasonal tendencies.
After peaking around February and March and declining into June, gold has accelerated again. Campbell says the next stage could depend partly on what happens with the U.S. dollar.
Because gold typically has an inverse relationship with the dollar, renewed strength in the greenback could pressure the precious metal. A weaker dollar, however, could provide further support.
Russell 2000 flashes a risk signal
U.S. small caps are also giving investors something to monitor.
A long-term indicator Campbell follows for the iShares Russell 2000 ETF (NYSEARCA:IWM) has recently crossed into negative territory.
He stresses that a negative reading does not mean markets immediately sell off — and previous signals have not always resulted in significant declines. Instead, Campbell views it as a reason to remain conscious of risk within the small-cap segment.
Meanwhile, relative rotation graphs tracking volatility indices are showing a mixed picture rather than a synchronized move toward greater market stress.
The combination leaves Campbell expecting September could become choppier without currently seeing evidence pointing toward something more severe.
For investors, that volatility may present an opportunity to reassess positioning and look for stronger opportunities heading into the fall.
Watch the video above and tell us your thoughts.