The stock market is experiencing a good year despite headwinds from sluggish inflation and high interest rates. The benchmark S&P500 (^GSPC -0.60%) has risen 18 percent, hitting more than three dozen record highs.

One reason for this dynamic is the enthusiasm for artificial intelligence (AI). NVIDIA The Magnificent Seven account for nearly a fifth of the S&P 500’s gains, and together they account for nearly 60% of the gains. Another reason for the market’s upward momentum is that most economists expect the Federal Reserve to achieve a soft landing, a scenario in which policymakers bring inflation back to target levels without triggering a recession.

How it works JPMorgan Chase Analysts summed up the situation in their half-year outlook as follows: “The economy is stronger than you think. AI is just getting started. Stock prices could continue to rise. Take advantage of the rally.”

However, stock markets could be in trouble, at least temporarily, as the S&P 500 typically declines in September.

History says the “September Effect” will drag the S&P 500 down

Historically, September has been the worst month of the year for the U.S. stock market. In fact, the market has fallen so consistently during this month that the phenomenon is called the “September Effect.” For example, since 2014, the S&P 500 has fallen in 7 of the 10 September months, or 70% of the time. And the declines have often been brutal, especially in recent years, as listed below.

• 2014: (1.6%)
• 2015: (2.7%)
• 2016: (0.1%)
• 2017: 1.9%
• 2018: 0.4%
• 2019: 1.7%
• 2020: (3.9%)
• 2021: (4.8%)
• 2022: (9.3%)
• 2023: (4.9%)

The September effect has a silver lining. The S&P 500 typically rebounds in the following months of the year, and November has been the index’s best month over the past decade, as the chart below shows.

The chart shows the average monthly return of the S&P 500 over the past decade. Historically, September has been the worst month of the year for the stock market.

As shown above, the S&P 500 has fallen an average of 2.3% in September over the past decade. But the index has also rebounded significantly in October and November.

Importantly, a similar pattern continues over longer time periods as well. Using hypothetical data backtested to 1928, the S&P 500 has declined 56% of the time in September, and the index has declined 1.2% on average, according to Yardeni Research. However, the S&P 500 has also produced a positive return more frequently in October, November and December.

However, past performance is no guarantee of future results. More importantly, it is macroeconomic fundamentals and corporate financial results that drive the stock market, not random circumstances such as the month of the year.

Marketing timing strategies are prone to failure

Investors may be tempted to skip September by selling stocks now and buying them again after the month ends. That would be a reasonable strategy if the S&P 500 was guaranteed to fall in September. But no one knows with absolute certainty how the stock market will perform on any given day, let alone over the course of an entire month.

The problem with market timing strategies is that missing a few good days can have lasting consequences. For example, according to JPMorgan, $10,000 invested in an S&P 500 index fund in July 2004 would have grown to $73,172 by July 2024. In this scenario, the money has compounded at 10.5% annually. However, if the 10 best days were eliminated, that $10,000 investment would have been worth just $33,523 by July 2024. In this scenario, the money has compounded at 6.2% annually.

Given these facts, investors have asked, “Okay, but what would my return have been if I had avoided the 10 worst days?” In this case, the return would have been over 10.5% annually, but whoever asks that question has missed the point. Not even Wall Street analysts can accurately predict stock market movements, at least not in the long term. So why risk long-term underperformance?

In December 2023, Wall Street analysts from 13 investment banks said they expected the S&P 500 to end 2024 between 4,200 and 5,200 points. Essentially, all of these analysts have since revised their forecasts, as the index currently trades at 5,625, which is 8% above the highest initial price target. Of course, the market could suffer a setback before the end of the year, but that would not change the fact that it is impossible to reliably predict the ups and downs of the stock market.

Bottom line: Investors should stay invested through September. If the market falls, use the losses to buy a few shares of your favorite stocks. If the market rises, be glad you stayed invested. Whatever the case, remember the golden rule: It’s not the timing of the market that matters, it’s the time you’re in the market.

Personally, I like JPMorgan’s assessment of the situation. The artificial intelligence boom is just beginning, and many AI stocks will certainly continue to rise in the long term.