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September Is Historically the Worst Month of the Year for Stocks. Will 2019 Be Any Different?

The month of September has long had a reputation as the worst month for stocks. And following an exhaustingly volatile August, investors are clearly on edge.

For the past 50 years, September has historically marked the worst month of the year for the Dow, with stocks down an average 1%. And with the Dow closing almost 300 points down on Tuesday (the first trading day of September), some investors have deja vu.

However, while August was no walk in the park (we saw the worst three days of the year, plus 1% swings in both directions, according to LPL Financial), September may not be as big a concern as some investors believe. In fact, if you shorten the time frame to the past 10 years, August has actually proved to be the worst month.

“I don’t think that investors should be intensely focused on the correlation of the calendar and the market's performance because, while it’s useful to know about and to perhaps be cautious because of risk, every year can be different," says Mark Hamrick, chief economic analyst at Bankrate.com.

In fact, the S&P 500 started the month of September above its 200-day moving average—which, LPL Financial's senior market strategist Ryan Detrick suggests, is a good sign of an uptrend. According to data provided by LPL Financial, 8 out of the past 10 times the S&P 500 started September above its 200-day moving average, the index finished up for the month (finishing an average 1.64% higher). And for those years, Detrick tells Fortune, "September has actually kind of been a non-event."

In fact, Detrick says that, "where you tend to see worse Septembers is when the market is kind of weak and beat up heading into September, and I know we had a rough August, but really we’re not that beat up.” Emily Roland, co-chief investment strategist at John Hancock Investment Management, believes that though "everybody has been talking a lot about the seasonality impact coming up for September," she doesn't see it weighing too heavily on the markets.

The bigger risk factors are already out there

That's not to say it will be smooth sailing. Experts suggest that growing trade concerns, recession warning signals, an inverted yield curve, and a contractionary manufacturing sector may make for an interesting mix in the markets this month.

"To the degree that September is here and that people are reminded of historical patterns of the market, I think that the risks are so well advertised at this point that this really shouldn’t be news to anybody," Hamrick says. In fact, Roland suggests “You can get faked out by relying on this seasonality impact too much." She says she's watching the deterioration in the global economic growth backdrop and possible recession signs more so than a particular month.

SEI's chief market strategist James Solloway concedes that geopolitical issues are what will end up moving these "clearly skittish" markets—"We’ve seen what a random tweet can do," Solloway says.

With the Institute for Supply Management’s manufacturing index falling to 49.1 in August (signaling it is now contractionary), many analysts like Solloway believe the slowing manufacturing sector is the "most important" factor to watch.

"You have to take a look at what else is going on to really make a determination as to what the current month has in store for us," Solloway says.

Potential for a late-year (and late-cycle) rally

There is, however, a bit of good news. LPL Financial data shows that the rest of the year has actually been higher for stocks whenever August was down—for the past 15 times, in fact.

"[For] August, September, [and] October, you tend to get that volatility and then you tend to get that upward resolution,” Detrick says.

To that end, instead of holding on for dear life during September, economists and analysts alike suggest September as a time to re-evaluate (and rebalance) your portfolio.

“You almost might want to use this as an opportunity," Detrick tells Fortune, noting that investors may be wise to use the August, September, and October volatility and sell-offs "as more of an opportunity to buy things on sale, because we do not see a recession," he says.  

And while both Roland and Detrick believe a recession may still be a ways off, John Hancock's Roland says the company is pivoting to trading small caps for large caps, reducing exposure to international and emerging market equities in favor of the U.S., and improving the quality of investments within fixed income vehicles.

“We’re looking at this as an opportunity to look for areas to prune risk within portfolios, but we also want to stay invested because we know there can be a further leg up for risk assets in these late-cycle type of environments," Roland says.

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