It’s been a rough year for investors in 2023. The TSX today has improved from the 52-week lows in the 18,000 range, now above 20,000, as of writing. Yet that could all turn around, and likely will, come September.
Why September?
It’s long been acknowledged that there is a “September Effect” in the markets. Think about the recent few years, and you’ll see what I mean. It’s true that stocks went through a rally during the pandemic. But when September 2021 hit, the market started to get a bit shaky.
The stock market started to show signs of weakness in the areas that did well during the pandemic. This especially happened around tech stocks. Lightspeed Commerce (TSX: LSPD), for example, dropped suddenly by 30% from a short-seller report. It still hasn’t recovered from that.
From the end of August to mid-September 2021, shares dropped on the TSX by 3%. In 2022, it happened again, with shares in September dropping by about 7%. As for this year, there was already a major dip in July once interest rates came out. Yet with September around the corner, there are many factors that could influence another drop.
The September Effect
Whether there’s an actual reason for the September Effect is up for debate. It’s merely a market anomaly that seems to happen even in a strong market. There are numerous theories about why this happens.
One such theory is that there is a seasonal behavioural bias in September, as investors start making portfolio changes. This allows managers to cash in at the end of summer ahead of the third trading quarter close. Therefore, institutional investors can lock in profits before the end of the year, or harvest tax losses.
Retail investors also have their place, as many individual investors choose September to liquidate stocks and use the cash for numerous reasons. It might be to pay for the summer vacations they enjoyed or to offset the price of their children’s school supplies. This trend leads to a turn in market sentiment, leading to a lower stock market.
Yet there is one very real part of the 2023 potential for a September Effect: interest rates.
A rate hike and how to manage it
The next rate hike by the Bank of Canada could come down in September, and it’s likely that it will. This could also lead to another drop in the stock market, similar to what we saw back in July. This should lead to an even further drop in the TSX. So, if 2021 was bad and 2022 was worse, then 2023 could be the worst.
That being said, this could identify a market bottom that investors may want to look out for! It’s also why now could be a great time to add some stocks to your watchlist and see if they drop by 5% or more. You can then gain a great deal!
Just keep it safe. Stay with essential stocks such as utilities, infrastructure, or others. A great option right now would be Canadian Pacific Kansas City (TSX: CP). CP stock is still near all-time highs, so a drop would bring in easy access to quick returns. Plus, with the acquisition of Kansas City Southern Railway, there are a lot of further returns coming the company’s way.
Bottom line
While the stock market could drop again in September, there are always opportunities to be had. Simply start preparing if you want to get in on a deal, and this September Effect could create some significant returns by October.
