Since the first day of September this year, both the KOSPI and KOSDAQ indices recorded a drop of more than 1%. The 'September effect' has been mentioned again in the market. The September effect is derived from the historical underperformance of the U.S. Standard and Poor's (S&P) 500 index in September when considering monthly gains and losses.
In particular, over the past five years, the Morgan Stanley Capital International (MSCI) World Index recorded a decline of -4% specifically in September. Not only in the United States but September has also been the worst month for stock markets globally. The first line of T.S. Eliot's poem 'The Waste Land,' 'April is the cruelest month,' is paralleled in the stock market as 'September is the cruelest month.'
Of course, there are claims that the September effect is merely a trap of averages. Exceptional events occurring in September, such as the 'Great Depression' in 1929, the collapse of Lehman Brothers in 2008, and the interest rate shock in 2022, have dragged down returns and made it seem particularly poor, suggesting that there is no seasonality. Ken Fisher, chairman of Fisher Investments, recently advised to assess the future growth potential of investment assets, noting that since one wouldn't be investing for just one month, it's better to check.
However, it is worth considering the thin supply and demand. The completion of the U.S. summer vacation season, along with corporate tax payments and the Jewish New Year, Rosh Hashanah, has resulted in tighter supply and demand, causing the market to react more sensitively; this has been the logic behind the September effect.
This year, the sense of crisis regarding supply and demand is greater as the Federal Open Market Committee (FOMC) meeting in September approaches. Kim Kyung-hoon, a research analyst at DAOL Investment & Securities, noted that the reverse repurchase agreement (RRP) balance of the Federal Reserve has been completely depleted. The RRP balance refers to the amount of money that banks and financial institutions have entrusted to the Fed.
Kim explained that if the Fed continues its quantitative tightening (QT) while the RRP balance is depleted, it will begin to erode the reserve requirements, and private financial institutions will have to support the demand for new Government Bonds issued by the Treasury. In simpler terms, market interest rates could experience volatility depending on the results of bond auctions.
There are expectations in the market that the Fed will lower the key interest rate at the September FOMC, but some opinions suggest that this dependence is excessive. There are differing views on the ultimate level and timing of interest rates.
BNY Mellon noted that given the summer rally itself has heavily relied on expectations for rate cuts, if a hawkish stance is reinforced at the September FOMC, short-term adjustment pressures could increase.
BNY also mentioned that due to optimism, investors have increased their exposure to cyclically sensitive sectors while decreasing their exposure to defensive stocks, and they are actively utilizing leverage. This indicates that risks are not being reflected, which could lead to greater market volatility from minor shocks.
Genuine crises often arrive without warning, so the September effect may not manifest. However, in moments when one cannot guarantee whether it will be a cruel month or an ordinary month, it is advisable to at least check the investment portfolio and cash ratio. When shocks occur, relying only on sell-offs or endurance should not be the only options available.