Should You Buy Stocks in September? Here's What History Says.

September isn't known to be one of the best months for stock performance. Over the past century, the S&P 500 index has, on average, slipped during this month, a phenomenon known as the "September Effect." The past four years continued this trend, with losses between 4% and 9% for the index. So far this year, we're following that path, with the S&P 500 heading for a September decline of more than 3% -- and we're still in the early part of the month.

This September's drop has been broad-based as companies such as retailer Dollar General , tech giant Super Micro Computer , and biotech company Moderna were among the 10 worst performers -- with double-digit losses -- in the S&P 500 so far. All three of these companies climbed in the earlier months of the year, and Supermicro even soared 188% in the first half. Now, as this September's performance unfolds you may be wondering if you should buy stocks this month or stay away. Here's what history says.

Image source: Getty Images.

What's behind the September Effect?

First, though, let's take a quick look at what may be behind the September Effect. Analysts have speculated that the reason for declines might have to do with portfolio managers returning from summer vacation and adjusting their portfolios. Another idea is these managers may be performing some window dressing -- buying or selling certain assets to lift performance -- before year-end. But no one truly knows why stocks typically have retreated in the month of September.

Now, let's take a look at what history shows us about this situation. If we look at the past four years of September losses, we can see that in the three months that followed, the index advanced. The S&P 500 went on to gain 11%, 10%, 7%, and 11% in the last three months of 2020, 2021, 2022, and 2023, respectively. So recent history tells us that, even after a glum September, the market has rebounded, even advancing in the double digits.

And, even better, if we look at the S&P 500 's performance over time, for example the past 10 years, we can see that after every dip -- whether in September or at another point -- the index has gone on to significantly climb.

^SPX data by YCharts

All of this points to one thing. History shows us the September Effect is a temporary situation and is unlikely to set the market back for very long. And this tells us that potential September declines shouldn't scare us away from the stock market.

Stocks trading at a discount

In fact, now actually makes a fantastic time to get in on stocks. That's because many solid players with great long-term prospects are trading at a discount due to the recent declines. An example is Nvidia (NASDAQ: NVDA) , the top artificial intelligence (AI) chip maker that's soared more than 100% over the past year. The stock has lost about 12% since the start of the month, leaving it trading for 36 times forward earnings estimates . That's down from nearly 50 times just a few months ago.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) , the owner of Google, makes another great buy on the dip as the stock now is trading for 19 times forward earnings, down from more than 24 times back in July. The company dominates the internet search market, and its cloud computing business is growing in the double digits.

So, history shows us that, in recent years, a lackluster September has led to end-of-year gains -- and even if that trend doesn't repeat itself, we know that over time the S&P 500 always emerges from the tough times and goes on to climb. This doesn't mean that every stock will rise in the future. But if you choose companies with proven track records and solid future prospects -- and even add in a few newer unproven players that could thrive down the road -- you're likely to win over the long run . And history tells us now is the perfect time to start or add to this exciting portfolio.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool recommends Moderna. The Motley Fool has a disclosure policy .