Weekly Update

September Delivers, so Far

Tagged: , , , , , , , , , , ,

Published September 22, 2023


Below we present an article from the Wall Street Journal talking about the September Effect in stock prices. With the month of September now ¾ of the way done, we find that stocks have lived up to their sour September reputation, so far falling anywhere from 3-6%.

Here’s how September looked to the Wall Street Journal back in early August:

“September is traditionally the weakest month for U.S. stocks. This year, investors say the turning of the calendar should be especially worrying.

Stocks have risen sharply after last year’s selloff, defying any number of risks along the way. The S&P 500 is up 17% so far this year, including a 3.1% increase in July that reflected gains across all 11 sectors. Wall Street’s so-called fear gauge, the Cboe Volatility Index, aka VIX, is sitting well below historical averages.

If history is any guide, investors’ optimism will soon be put to the test. The S&P 500 has lost an average of 1.1% in September dating back to 1928, making it the worst month for stocks’ performance. It isn’t just a few bad years dragging down returns: The broad index has risen less than 45% of the time over that period, also the worst month by that measure, according to Dow Jones Market Data.

Average monthly S&P 500 returns since 1928

There is no clear reason for what is known as the “September Effect.” But it is typically a month without the type of news that can push stocks higher, such as major corporate earnings, said Jay Hatfield, chief executive officer of Infrastructure Capital Advisors.

“The basic theory is that good news almost always comes from the companies, and the bad news comes from random events.” Hatfield said.
So far this year, investors have brushed off fears of high inflation, a significant decline in corporate earnings, a possible recession, a standoff over the U.S. debt ceiling, and the largest bank failures since the global financial crisis.

But there are warning signs that this year’s rally could lose steam. Valuations are above their recent norms, with the S&P 500 trading at around 19 times forward earnings estimates, according to FactSet. The one-year average is 17.7 times. Inflated valuations alone don’t cause stocks to drop, but they can make a decline more severe.

Meanwhile, the 10-year Treasury yield is at its highest level in nearly a year, making it less attractive to hold stocks instead of bonds. On the borrowing front, some fear the repercussions of the highest interest rates in 22 years have yet to take full effect in the economy. And many investors think the Federal Reserve will need to keep rates higher for longer, particularly with rising oil prices threatening to stoke inflation again.

“If we were to put the kibosh on the idea that the Fed is done, then we might have an issue,” said James Bianco, president of Bianco Research.

U.S. economic growth accelerated in the second quarter from the first three months of the year, raising hopes that the Fed would manage to pull off a soft landing. Yet some bears think it is too soon to say the risk of a recession has faded.

“We’ve just been through the most aggressive hiking cycle in my career. It’s a bit presumptuous to think we’ve felt all those effects,” said Rob Williams, chief investment strategist for Sage Advisory Services. He said that the outlook is better for bonds than for stocks. Within stocks, he prefers more-defensive sectors such as consumer staples that tend to perform steadily even in a sluggish economy.

In August, the S&P 500 closed down 1.6%, compared with its average gain of 0.67% for the month. The market index was down as much as -5.4% before rallying back.

The artificial-intelligence enthusiasm that has powered tech stocks higher could also sputter. The end of earnings season soon after could create a void of good news until the fall.

“Once Nvidia presents earnings, then what’s your catalyst?” asked Hatfield of Infrastructure Capital Advisors. He said he expects stocks to pull back in September, then rally again in the fourth quarter.”

Frequency of S&P 500 gains by month since 1928


Market Update

After three weeks of tight trading stocks finally appeared to pick a next direction this week. That direction looks to be lower. Stocks were flat Monday as investors awaited the Wednesday meeting of the Federal Reserve to provide further clues to the path of interest rates. Investors have been thinking the Fed was finished with their rate-raising program and that rates might even begin coming down sometime next year. But strengthening economic numbers have caused some rethink to that assumption. That has led markets to trade in a narrow range since July. Stocks tipped downward Tuesday as interest rates ticked higher. Wednesday’s Fed meeting produced the “higher for longer” interest rate talk from the central bank that many have feared. Fed Chair Powell’s continued inflation-fighting tone pushed interest rates higher leading to a downward move in stocks. The broad market indexes tumbled -0.9%. The selloff accelerated Thursday with another -1.6% decline as interest rates hit highs for the year. Good earnings from FedEx and a big tech acquisition from Cisco failed to excite investors broadly. Friday capped the week with another negative session as a bounce at the open faded into a fourth straight down day. The S&P 500 slipped -0.2% while the Nasdaq gave up a +1% advance to close flat. Bond yields slipped back on the session. But they had already done their damage the day before rising sharply in Thursday’s trade. The 10-year yield, hitting 4.5% Thursday, looks poised to run to 5.0%, a level last seen in the years preceding the 2008 financial crisis. In short, the low interest rate environment of the past 15 years looks to be over, and markets are having to adjust to that dramatic change in landscape.

Stocks broke lower this week with some indexes undercutting the August lows. The S&P 500 lost -2.93% while the more interest-rate sensitive Nasdaq 100 (QQQ) fell -3.34%, though the index remains just above its closely-watched August low point. Smallcaps closed at their lowest level since May falling -3.80%.

Warm wishes and until next week.