September 07, 2023

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Good day. The market is a cyclical thing, meaning no matter how good a year's returns are, there's bound to be a month or two where it was red. Can you guess what the market's worst-performing month is historically? (don't cheat, guess now!) a. February b. May c. September. Follow the wave 🌊 below for the answer.

Here are the topics for today:

The Market's September Effect
FYI On Money Market Funds as Yields Top 5%
Keep Contributing to Retirement After Student Loans Resume

MARKET OUTLOOK

The Market's September Effect

Much like life itself, the stock market is a seasonal thing that endures different cycles at different times of the year. The market isn't usually quite as exacting as nature though, and its seasons can depend heavily on external factors.

It's hard to nail down precisely, but there are still distinct patterns we can identify that tend to give the market its seasonality around certain times of year — like the notion of "sell in May and go away."

But May isn't the only month known for its doldrums — September is perhaps 2nd most famous for this.

What happens in September?

A bad reputation: Dating back to 1928, the S&P 500 loses an average of -1.1% in the month of September, a drawdown that's become so common it earned the name "September effect."
Reliably dreary: September's bad reputation isn't just skewed by a few really rough months over the last century either. In fact, data finds that the S&P has risen in only about 45% of Septembers over that time span.
What's the reason behind this? There is no cold-hard reason for the September effect, but there are many anecdotal theories. Some would posit that investors are returning from summer vacation ready to lock in gains and start tax-loss harvesting, some say it's to take profit for school costs, and the most likely explanation? Market psychology and a self-fulfilling prophecy.

This year's story

This year, August is preceding it too. After 7 relatively strong months amidst inflation and recession concerns, the S&P 500 fell noticeably in August alongside the Nasdaq, Dow, Russell 2000, and a bevy of individual plays that had previously gained steam.
Waiting on the other shoe to drop: This year's events mark September as even more concerning. We've brought down inflation and rapidly hiked rates without bringing on a recession as a result, at least not yet anyway. The yield curve has been inverted for quite some time now, and some economists are approximating that we won't get away with this unscathed — maybe the impacts are just delayed.
Market outlook for Q4: Ultimately, September's outcome will set the pace for the remainder of the year. If we're able to escape without any impactful, negative catalysts, the market could very well rally into Q4. Otherwise, the environment remains choppy as is.

INVESTING

FYI On Money Market Funds as Yields Top 5%

After years of being relegated to the basement, rapidly rising interest rates have suddenly brought money market funds back to the limelight. With plenty of institutions offering yields north of 5%, it's easy to see why investors have trended back toward cash.

But is it too good to be true, and what's the catch, if anything? Here's all you need to know about these boring, but safe investments.

MMFs 101

How an MMF works: Similar to mutual funds, money market funds pool investors' money to invest in liquid, near-term securities like T-bills, debt-based securities, cash, cash equivalents, and more.
Not to be confused with a money market account (MMA), which is a cousin of a savings account offered by banks and credit unions. Unlike MMFs, MMAs don't invest and are also FDIC-insured, whereas MMFs are not.
In short, MMFs are usually highly liquid investment vehicles, they're essentially an efficient way of getting in on the high-yielding cash craze without having to buy up all those assets on your own.

Other considerations

Are there any risks? Outside of an unforeseen anomaly of a disaster, money market funds are safe, but they do have drawbacks. As mentioned above, they're not quite as safe as a savings account because of their lack of FDIC insurance, but they are protected by SIPC insurance. MMFs' main risk is simply interest rate risk, meaning that when rates go down, so will their yields.
Consider alternatives — Don't get lazy: Despite having its 7th worst year ever in 2022, the S&P 500 is up nicely at about 15% on the year — quite an impressive performance despite rate hikes and uncertainty. While the markets are more uncertain, it's worth noting that cash has outperformed stocks and bonds in only 13% of years since 1928. Don't underestimate the markets, and don't take the easy way out.
Don't forget taxes: Most MMFs are taxable and will be taxed at your usual income tax rate. One exception is tax-exempt MMFs, which only invest in securities from tax-exempt entities like municipal bonds, but often these are lower-yielding options.

FINANCIAL PLANNING

Keep Contributing to Retirement As Student Loans Resume

The student loan repayment moratorium that lasted for over 3 years had some extremely positive implications for retirement investors.

Fidelity found the amount of student loan borrowers who were contributing at least 5% of their pay to a 401(k) jumped from 63% pre-moratorium to 72% during the course of the repayment suspension.

During that same period, 401(k) loans taken by student loan borrowers also declined from 19% pre-suspension to 13% during the payment pause.

Now that repayments have resumed, how can you make sure to continue contributing to retirement?

Get on the right repayment plan: If you're not already enrolled in an income-driven repayment plan, now is the time to consider it if you're concerned about budgeting for your monthly payment. The Biden admin has made big adjustments to the terms on which you can repay your loans, terms that are heavily dependent on your income. In fact, if you make below a certain amount, your payment could be $0.
Budget for it: Debt repayments should always be included in your monthly budget just like any other expense, and student loans are no longer an exception to the rule. By allocating a portion of your budget to the payments, you avoid any surprises at the end of the month and reduce the risk of overspending.
Consider refinancing: Interest is a thing again, so if you find a private lender that offers a stand-out rate in exchange for refinancing with them and you don't have any unique benefits tied to your federal student loans (i.e., access to loan forgiveness and special repayment plans), it's certainly an option worth looking into.
Stay informed and proactive: The whole student loans situation is in flux right now with political and moral agendas being waged right and left. News on the matter is coming out consistently, and it pays to be informed on the latest happenings so you can plan accordingly.
Don't be afraid to seek out professional assistance through your workplace's financial wellness offerings – take full advantage of any financial benefits available to you.

Boost Your Retirement Savings

Retirement Planning

8 mins

🌊 BY THE WAY

📊 Answer: September. According to our latest data, the S&P 500 averaged a net loss of -1.1% in September between 1928 and 2023 (Yardeni)
💲 How a ban on Chinese AI investments could change VC (Axios)
👀 ICYMI. Changes coming to how we send money (Finny)
🤖 Zoom wants to train AI on your video calls (Quartz)
📚 Finny lesson of the day. As we explore the idea of seasonality in the market, it's also paramount to remember one thing — time in the market beats timing the market:

Time In The Market Beats Timing The Market

Investing Basics

1 mins

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