September Seasonality and Midterm Elections Put Volatility Back in Focus

September has a long-standing reputation as the stock market’s most difficult month, and that pattern carries extra weight in a midterm election year.

The historical record does not mean stocks must fall, but it does help explain why investors often approach September with more caution, especially when policy uncertainty, interest rates, inflation, or geopolitical risks are already elevated.

The seasonal weakness is well documented. Dow Jones market data shows the S&P 500 has averaged a roughly 1.1% decline in September since 1928, making it the weakest calendar month on average. Stock Trader’s Almanac similarly notes that September has been the worst performing month for the Dow and the S&P 500, although the average S&P 500 September loss has been slightly better in midterm years. In addition, September has been the worst month for the Nasdaq as well, since 1971, and for the Russell 1000 and Russell 2000, since 1979, according to the Almanac.

What Can Drive the “September Effect”?

There is no single accepted reason for the “September effect,” but several explanations make sense.

Trading desks return from the slower summer period, liquidity normalizes, and investors often reassess portfolios before the final quarter. Mutual funds and institutions may also rebalance, harvest losses, or clean up holdings ahead of fiscal year-end reporting. At the same time, September often brings a heavier macroeconomic calendar, including Federal Reserve meetings, inflation data, budget deadlines, and updated corporate outlooks after the second-quarter earnings season.

Midterm Election Years Can Add a Layer of Uncertainty

U.S. voters on November 3 will cast ballots for all 435 members of the U.S. House of Representatives and 35 senators, as well as 36 governors and thousands of local officials. Equities have historically been subdued and more volatile ahead of midterm elections, with the S&P 500 averaging a 1.7% gain from August 1 through election day since 1974 as investors confront greater uncertainty over fiscal, tax and regulatory policy. After election day, the index has averaged gains of 5.7% over the following three months and 12.4% over six months, potentially reflecting reduced political uncertainty and renewed attention to economic and corporate fundamentals, according to data parsed by the Schwab Center for Financial Research. But past performance of averages is no guarantee of future results because recessions, Federal Reserve policy, inflation and earnings conditions can outweigh the election cycle, while unusually strong years can distort the historical results. See Andrew Arons on September Volatility, Buying AAPL, NFLX & TJX

How Do Markets Respond to Election Uncertainty?

The market’s midterm-election year weakness may be less about party politics and more about uncertainty. Investors must reframe possible changes in tax policy, regulation, fiscal spending, trade policy, deficits, and congressional control. When the range of possible outcomes widens, investors often demand a larger risk premium, which can pressure equity valuations in the short term. As election day approaches and the range of outcomes narrows, markets have often stabilized or improved, though that pattern is never guaranteed.

When September weakness and midterm election uncertainty arrive in the same year, the result can be a more fragile tape. Investors may already be inclined to reduce risk because of seasonal history, while election uncertainty gives them another reason to delay new commitments. That can make markets more sensitive to inflation surprises, Fed communication, earnings revisions, and geopolitical headlines. See Sam Stovall on NVDA Earnings, Growth 'Soft Patch' & Midterm Speed Bump to SPX

Seasons and Elections Matter, But So Do Fundamentals

Still, seasonality and election cycles are contextual in nature, not destiny. History shows that September and midterm years can be choppy, but they do not necessarily override fundamentals. Earnings, rates, inflation, liquidity, and policy direction ultimately determine whether seasonal equity weakness becomes a short-term pullback or a deeper correction. See Bodner: Expect "Choppy" September, NVDA Set Stage for End of 2026 Rally

This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any decisions.

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