What Does The Rest of the Year Portend?

Here we are on the cusp of Labor Day wondering, as usual, where the heck summer went. Labor Day portends many things–summer’s end, school, football, cooler weather, and for most, a return to the grind. While we here in this country have not embraced the European concept of summer as one long vacation, the fact remains that the summer months seem less busy. This applies to the stock market as well. Vacationers usually aren’t engaged in the business of commerce while sitting on the beach or traveling, playing golf or fishing, and as a result the mood of market adopts a relaxed tone as well.

Labor Day changes everything, however. Labor Day signals that playtime is over. Back to work. The end of the year is in sight. Time to close those deals, get those contracts signed, and finish all the work that has sat on your desk since the Memorial Day recess. To get to the end of the year, however, we first must vault across the chasm of worry that is the months of September and October. While October is remembered for some of the market’s most significant implosions, September historically is the market’s worst month.

• September is the only month with a long-term negative average annual return.
• Historically, September is negative about 55% of the time.
• Since 1928, the average annual return for September is -1.17%

There are other factors and statistics to consider as well. According to Carson Investment Research, “when the S&P gains more than 1% in August and produces five or more record highs, September has been negative even more often.” If you want to get into even more obscure facts, consider the fact that “every mid-term election year for 50 years has delivered a drawdown. The average peak-to-trough decline in those years is 17%. We have had nothing close to that this year. This doesn’t mean it has to happen. Every year is different.

The VIX, long regarded as a gauge of fear, sits at a very complacent 15.28 as I write this. The highest VIX reading ever recorded was the intraday high of 89.53 on October 24, 2008. More recently, the VIX closed at 82.69 on March 16, 2020, when the Covid panic had everyone thinking that mankind was in danger of extinction. The lowest closing price for the VIX was 9.14 on November 3, 2017. The VIX obviously is much closer to its complacent low than its panic high. A complacent market is susceptible to shock.

There certainly are a host of worries hanging over the market presently, but that is not unusual. In my 30+ year career I cannot remember a single day in which the market was not combating a fear of some type. We currently are dealing with a war, high oil and gas prices as a result of that war, government spending that remains out of control and for which there seems to be no solution other than considerably higher taxes, and inflation that won’t go down because we live in an oil-based economy. It’s a circular problem. Inflation is high because oil prices are high because we are at war with a country that has control over a waterway through which 20% of oil production flows.

Paul Tudor Jones, whose market observations carry great weight, notes that the stock market’s capitalization (the value of all stocks) currently sits at 252% of our Gross Domestic Product (GDP). GDP is the value of all goods and services produced by an economy over a specific time. By comparison, in 2000 that percentage was 170%. In 1987, it was between 85-90%. According to Jones, “we are over-equitized as a country. We have the highest individual equity weightings in the history of the country.” What is he implying? His opinion is that the stock market has already accounted for every possible piece of good news and priced that news into stock prices. In his view, it is going to be increasingly difficult to make money in stocks over the next decade. The spectacular earnings growth that we have seen this year and that has supported these expanded valuations will certainly make for some difficult comparisons next year and will make any further earnings growth seem muted.

All of this is history, of course. And history never repeats itself exactly. Nor do these statistics guarantee that these dire predictions will come true. The intelligent investor respects this historical data, however. So, what to do? The question of taxes must be factored into any examination of stock exposure. An average 1% decline is September is no reason to sell your positions and incur federal and state taxes that will cost you 20% or more of your gain. However, this would be a good time to examine your portfolios to determine which investments perhaps are outside of your investment comfort zone. If income is your primary consideration and you bought some technology stocks to ride the A.I. wave, consider trimming or closing those positions. Similarly, if you consider yourself a conservative investor and find that your portfolio contains numerous stocks that seem aggressive to you, consider trimming. This is especially true in retirement accounts, where selling does not trigger a capital gains bill.

I am not entirely pessimistic, however. As I have learned, the stock market does its best to confound the greatest number of people at one time. If everyone is looking at the same facts that I am and predicting a market decline, you can bet that it won’t happen. Ryan Detrick, who for years was LPL’s Chief Market Strategist and a great source of obscure market data, posted recently on Twitter that “the four best September returns ever all took place during a midterm year, as did five of the top seven. Hmmm.” I started by telling you that a market drawdown has taken place in every midterm election year for the past 50 years, but Detrick tells us that September has in the past been a month for explosive gains in a midterm year. Is this confusing? Not really. We may still have a drawdown, but maybe not in September. I think the results of the midterm elections and a result that the stock market doesn’t like is more likely to trigger a correction than any examination of historical data could.

Enjoy this last week of summer

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