Both in the UK and the US, the stock market hasn’t made a great start to the month. The FTSE 100 and the S&P 500 are both down since Monday (1 September).
This, however, isn’t that unusual. Historically, September has been a bad month for share prices and there are some important reasons why this is the case.
The ‘September Effect’
The decline in the stock market a this time of year is well-known enough to have a name. It’s called the September Effect and there are several potential explanations associated with it.
One is higher trading volumes. The idea is that, as professional investors get back to work after their summer vacations, increased activity leads to bigger movements – in either direction.
The reason this results in share prices falling – rather than rising – is often attributed to tax-loss harvesting. This involves selling stocks that are down to offset tax liabilities on ones that are up.
Whether or not either of these is the right explanation of the well-documented September Effect is open to question. But I don’t think it’s the main reason share prices have been falling this week.
Market movements
Concerns over the UK economy have sent 30-year government bond yields to 27-year highs. Right now, there’s a return of almost 6% on offer from an asset where the risk is extremely low.
Source: Trading Economics
That naturally creates downward pressure on share prices as investors look for better returns from stocks as a result. And this is an important part of why the FTSE 100 is down this week.
At the same time, the US Court of Appeals has ruled a number of President Trump’s latest tariffs illegal. The case is likely to proceed to the Supreme Court, but the verdict creates further uncertainty.
Investor positioning might well be amplifying the effects of these developments. But I think it’s these specific features – rather than seasonal trends – that are weighing on share prices right now.
Buying opportunities
I’m looking to use the heightened volatility as a buying opportunity. And a stock on my radar is 3i (LSE:III) – the FTSE 100’s top-performing stock of the last 10 years.
Unlike other private equity companies, the firm focuses on deploying its own capital. That means it’s able to be selective about when to buy, rather than being constrained by external investors.
Despite falling 6% in the last week, 3i shares trade above the value of its portfolio. That means the needs to find future growth opportunities to justify its current price, which is a risk.
As I see it, though, a 55% premium to the firm’s book value is more than justifed by a 22% return on equity. That’s why it’s on my buy list at today’s prices.
Wake me up when September starts?
Given the September Effect, investors might wonder whether waiting until the end of the summer to buy shares is a good plan. But that isn’t always the case.
With 3i, the stock is still 7% higher than it was at the start of the year. So waiting nine months for a potential sell-off would have been a mistake – and I’m glad I didn’t.
