History Says September is the Worst Month for Stocks. Should You Really Invest Now?

Key Points

• The S&P 500 has advanced 1.9% this month amid positive corporate news and optimism about a possible interest rate cut.

• Valuations are at one of their highest levels ever.

• 10 stocks we like better than S&P 500 Index ›

Investors often approach the month of September with a bit of apprehension. That's because, over time, this month has been the worst month for the stock market, generally resulting in losses for the S&P 500 (SNPINDEX: ^GSPC). Over the past 75 Septembers, the index has delivered an average decline of 0.7%, according to Bloomberg. And recent years have confirmed this, with the S&P 500 slipping in four of the past five years for the month of September.

The index so far is defying that trend, though, as it's climbed 1.9% so far this September. Of course, more than two weeks of trading remain in the month, so there's plenty of time for the index to keep roaring higher -- or reverse direction. Considering all of this, should you really buy stocks now? Let's find out.

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S&P 500 performance over five years

First, let's take a look at the performance of the major benchmark over the past five years. The S&P 500 advanced last year during the month of September -- but in the previous four years, it slid between 3% and 9%.

Data source: YCharts.

So history shows us there's a greater likelihood that the benchmark will decline this month than rise. That said, it's important to note that many factors may get in the way of a historical trend. And two big ones are corporate news and economic news or happenings. We've already seen the former take action this month, helping to lift the benchmark.

For example, tech giants Broadcom and Oracle both reported strong gains in their artificial intelligence (AI) businesses in the latest quarter, propelling their share prices -- and the prices of other tech stocks -- higher. Tech stocks are heavily weighted in the S&P 500, so any movement can determine the direction of the index.

Broadcom, in a report on Sept. 4, said AI revenue soared 63% to $5.2 billion and predicted it will reach $6.2 billion in the next quarter. Then, this past week, Oracle wowed investors with its forecasts for cloud infrastructure revenue -- driven by AI customers -- in the years to come. The company said revenue from this business increased 55% in the quarter to $3.3 billion and forecast it will advance 77% to $18 billion in the fiscal year -- then progress to $144 billion in four years.

Nvidia's prediction

This follows Nvidia's prediction last month that AI infrastructure spending may reach $4 trillion by the end of the decade. All of these forecasts have helped supercharge interest in technology stocks, and as a result, drive the S&P 500 higher.

Due to this positive momentum, stocks, as a whole may be seen as expensive. A look at the S&P 500 Shiller CAPE ratio, an inflation-adjusted view of stock price in relation to earnings, confirms this. This metric has reached 37, a level it's only surpassed two other times in the past. This suggests that it may be hard to find bargains in the current environment.

S&P 500 Shiller CAPE Ratio data by YCharts

Finally, as we head into a new week, another catalyst sits on the horizon, and that's the Federal Reserve's decision on interest rates. The Fed's decision is set for Wednesday, and economists are expecting a rate cut -- such a move could boost stocks as investors focus on the idea of lower costs for the consumer and for companies that take on debt.

Now let's return to our question: Should you really buy stocks in September, considering this full picture? After all, valuations are high, and there's still time for the index to follow historical trends and decline this month. Still, the positive corporate news we've seen may continue to buoy stocks, and an interest rate decision could possibly offer positive momentum too.

Take a long-term view

What's an investor to do? The answer is simple. Think long term. Don't be distracted by the general valuation picture and the direction the index takes this month -- instead, this month and every month, consider stocks individually. Look at a particular stock's valuation, the company's financial health, and its long-term prospects. If the stock is reasonably priced and these other elements are positive, you may have found yourself a great stock to buy.

It's important to remember that the S&P 500 always has recovered from down times and gone on to deliver gains. In fact, it's registered a 10% average annual gain since its early days.

So, when you focus on the long term, you can invest during any month or market environment -- and you'll be able to sleep at night without worrying about what happens next.

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Adria Cimino has positions in Oracle. The Motley Fool has positions in and recommends Nvidia and Oracle. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.