September has historically been the worst month for U.S. stock markets, with the S&P 500 delivering negative returns 53% of the time over the last 15 years, according to market analysis. The S&P 500 has fallen by an average of 2.7% in September over the past five years, making it the most challenging month for equity performance. This pattern is particularly pronounced in midterm election years, where the S&P 500 has declined by an average of 18% at some point during midterm election years between 1950 and 2022, as reported by Carson Investment Research. The low point during midterm election years has occurred more often in October than any other month, with drawdowns typically beginning in September.
Market volatility has reached its lowest levels in over two months, with 21-day realized volatility falling to 7.4%, equivalent to approximately 46 basis points daily movement. According to market analysis from Investing.com India, this represents a significant decline from previous levels, creating conditions that could trigger an unwind in current market positioning. The S&P 500 rose by 46 basis points during the trading session, while implied volatility measures were also lower overall. The S&P 500 has added 12% year to date, putting the benchmark index on course for its fourth consecutive year of double-digit gains.
Implied correlation fell on Wednesday, with *CBOE's 1-month index dropping to 10.6%**, as reported by Investing.com India. However, the broader trend shows implied correlation has been grinding higher since early July, even as realized volatility continued falling and single-stock volatility dropped. This divergence between implied and realized volatility suggests potential for market unwinding, particularly as index volatility has been holding up better than the stocks beneath it for the past two months.
Semiconductor implied volatility also fell during the trading session, even as Broadcom (NASDAQ:AVGO) was set to report results, according to Investing.com India analysis. The decline in semiconductor volatility is attributed to a general lack of interest in the group, suggesting reduced market sensitivity to sector-specific developments. This trend aligns with the broader market volatility compression across multiple sectors.
The current market conditions present what analysts describe as a recipe for something to unwind, as reported by Investing.com India. The VIX has essentially stalled out since early August in a tight range, while realized volatility, single-stock volatility, and even semiconductor volatility have continued to fall. The September Effect phenomenon, where investors anticipate losses and sell stocks to avoid them, could amplify the current volatility compression. Midterm election years have historically been the weakest of the four-year presidential cycle for the stock market, with intra-year volatility typically peaking during the third or fourth quarter, often starting in September.
