Seasonality

Take a look at the two charts below: the botttom one shows the seasonality of the S&P500. Since 1928, September is the only month that closes lower more often than higher for the S&P 500. The average return has been -1.10%. The back half of the month tends to be the weak spot (-0.91%), and in midterm-election years, like this one, the average drop widens to -1.50%, with intra-month drawdowns averaging close to -6.2%. The statistics don’t look good for investors this month. And the top chart is also telling something might be about to happen. The SPX 6-month realized correlation is sitting near the bottom of its 25-year range, territory last seen in Feb 2007 and Jan 2018. Both of those episodes were followed by sharp correlation spikes as markets reset (GFC in the first case, the Feb 2018 "Volmageddon" vol shock in the second). Low correlation isn't bearish on its own, it usually reflects a market driven by idiosyncratic, stock-specific stories rather than macro fear. But history shows these compressed regimes don't last. When correlation snaps higher, it tends to happen fast, and often coincides with broad de-risking rather than stock-picking. Put the two together and September's seasonal headwinds are landing at a moment when the market's "shock absorbers", diversification benefits from low correlation, may be more fragile than they look.

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