Stock chart

Since 1971, September has been by far the worst month of the year for U.S. stocks. The average September return on the Standard & Poor's 500 Index ($INX) from 1971 through 2012 is a loss of 0.52%, according to the Stock Trader's Almanac.

Considering that only three other months show an average loss of any size over that period and that the second-worst loss is the 0.1% turned in by February, September sticks out like a very sore thumb. (October, feared as the month of crashes, shows an average return of 0.74% in that period. Not as good as December's 1.7% return, of course, but then December is the head of the pack.)

Now, whether or not you believe in historical stock market seasonal patterns, the September data is a useful warning flag. If the numbers simply draw your attention to September and the likely trends this year, they've served an important function.

Because, on projections of current news, September shapes up as a volatile month, with way more downside risk than upside potential. September sure looks like a month for taking less risk rather than more, for having more money on the sidelines rather than less and for thinking about protecting gains and principal rather than rolling the dice.

And that's especially the case because it is extremely likely that any fears that take stocks lower in September will have passed by October or November.

I think investors would like to have some cash on hand as we flip the calendar page to October just in case September lives up to its downside potential and creates a bargain or two.

The immediate threat

So why do I think September has such downside potential?

The Federal Reserve, for one, and the political parties occupying opposite ends of Pennsylvania Avenue in Washington, D.C.

image: Jim Jubak

Jim Jubak

The Federal Reserve's Open Market Committee meets on Sept. 18, and at the top of its agenda is the matter of when to begin reducing the central bank's program of buying $85 billion a month in Treasurys and mortgage-backed securities. And that's making the stock and bond markets nervous. The fear is that any reduction in the Fed's monthly purchase will cause long-term interest rates to move higher, suppressing U.S. growth.

The Fed hasn't done a particularly effective job at allaying those fears because, in my opinion, it hasn't wanted to. Letting market fears push interest rates gradually higher and asset prices gradually lower would make an actual transition to a slower rate of purchasing -- or to the eventual end of the entire program of buying -- easier for the Federal Reserve by taking some of the air out of asset prices over a longer period of time rather than all at once. The Fed's repeated assertions that its decision will be based on the economic data has served to keep the market on edge, and that may be exactly what the Fed wants.

What's the Fed's read of the economic data? It's not exactly crystal clear, but I think the Fed is saying the economy is strong enough that a reduction in purchases is likely, either in September or at the FOMC meeting in October.

In July, after noting that the economy had expanded at a modest pace and that labor market conditions were improving with strength in the housing market, the central bank noted that fiscal policy was acting as a drag on economic growth. But the Fed also said it expected economic growth to pick up in the second half of the year and pointed out that downside risks had diminished since the fall of 2012.

To me that sounds like a Federal Reserve moving toward tapering its purchases. And a spate of speeches from Federal Reserve officials last week that, on average, added up to a belief that the taper had to begin sooner rather than later carried weight with me because the verbiage came from both advocates of an early taper and those members of the Open Market Committee who had argued in the past for a later taper.

As long as the Fed is talking about a taper but hasn't yet begun to reduce its purchases, it locks investors in place.

The likelihood is that an initial reduction from $85 billion a month to, say, $70 billion won't have a huge effect on the prices of stocks and bonds, but no investor really knows. But what's the upside of getting out in front of any actual Federal Reserve announcement?

Replay of 'fiscal cliff' debacle?

The talk out of Washington points to a replay of last year's fiscal cliff debacle. A substantial number of Republicans in the Senate and, more decidedly, the House have said no budget or continuing resolution unless Democrats and the White House agree to defund or repeal President Barack Obama's signature health care program, the Affordable Care Act, aka Obamacare. The same Republicans have said they won't vote to raise the debt ceiling without big cuts to discretionary spending programs that already have been reduced by the automatic reductions in the sequester. Democrats in the Senate and the White House have shown no inclination to agree and indicate instead that they believe that Republicans will take the blame if the government actually does shut down.

Without a budget, or at least a continuing resolution, the government will run out of spending authority at the end of September. The treasury looks like it will be able to juggle accounts so that it won't exceed the debt ceiling until sometime in October.

Right now the two sides aren't even talking, so it looks as though we'll either go down to the wire before there is a deal or, more likely, go past the deadline and see a deal only once the government has actually had to shut down.

Click here to become a fan of MSN Money on Facebook

If you look back to the run-up to November/December/January fiscal cliff "crisis," the market wasn't amused. The S&P 500 fell 7.2% in the two months from Sept. 13 to Nov. 15. This time around, we've got two crises on the same timetable -- the budget and the debt ceiling -- and it's hard to imagine that the market wouldn't have a similar negative reaction.