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Stormy September looms after ugly August

Adam Shell
USA TODAY

Adios August. Wall Street won't miss you one bit. The broad U.S. stock market -- spooked by a China-inspired growth scare and angst over U.S. interest rate policy -- suffered its first 10% drop in four years on its way to its worst monthly performance since May 2012 amid violent volatility that brought back bad memories of past market crises.

Traders at work at the New York Stock Exchange on Aug. 27, 2015. (AP Photo/Richard Drew)

Enter September -- but with trepidation. When it comes to blue chip stock performance, September has an unsavory reputation for staining investors' stock portfolios with red ink. And the market will have its fair of challenges in September 2015.

"We remain of the belief that the market will continue to be volatile until there is greater clarity about monetary policy in the U.S. and the prospects of economic growth in China," Jason Trennert, chief investment strategist at Strategas Research Partners, told clients in a note. "Add to these uncertainties a seasonally challenging time-period for U.S. stocks and we would urge those with short-term time horizons to tread carefully in the next two months."

September is the worst month of all for the Dow Jones industrial average in the past 50 and 100 years, according to Bespoke Investment Group. If you go back 100 years, the Dow has declined 0.83% on average in September (the only month to deliver a negative return). In the past 50 years, the blue chip stock gauge has tumbled an average 0.76% in September and finished higher only 38% of the time. The past 20 years haven't been much better -- although September is just the fourth-worst month.

Not only does September come with so-called "seasonal" baggage, this September's calendar also includes what could be the Federal Reserve's most important policy meeting since the stock bull market began in March 2009. When its two-day meeting ends Sept. 18 the Fed could hike short-term interest rates for the first time since 2006 -- a "lift-off" date that now is at the heart of a heated will-they-or-won't-they debate on Wall Street. Low rates have been a key propellant of rising stock prices since the market low some 6 1/2 years ago, a period in which the U.S. stock market more than tripled in value despite one of the slowest post-recession recoveries ever.

This September also comes on the heels of Wall Street's most volatile period since the 2008 financial crisis, with the Dow recently suffering a weekly drop of more than 1,000 points, an even scarier brief drop of almost 1,100 points on Monday Aug. 24, and then a nearly 1,000-point two-day rebound late last week.

When the calendar turns from August to September, it also doesn't close the current chapter on China's current economic and stock market woes. Beijing is still trying to soften the fall of what amounts to a stock market crash in mainland China and an economy that is slowing at a faster pace than global investors initially envisioned.

September comes amid warnings from Wall Street pros that the turbulence in markets may have not have fully run its course, and that more tough days of losses and wild market swings are still to come.

While market turbulence and drops of 10% or more can create "opportunities," investors should not let their guard down, says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

"The market we have today, following our first correction in 46 months, is not a market for investors with a low risk tolerance," says Frederick. "Still elevated volatility levels could keep some traders up at night as they try to figure out what comes next. ... There is little doubt that we could still see some big moves in both directions."

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