After seven months of gains, stockmarkets face the task of surviving September and its reputation as the worst month of the year for equities.
And because markets are global these days, any sign of a slowdown or a sell off in a reworking of traders’ views of the future for Wall Street, will have a knock-on impact elsewhere.
Summer in the US ends not at the end of August, but around Labor Day, which this year is next Monday, September 6. The equinox on Wednesday, September 22 is the official end of the US summer.
Here in Australia is AFL and NRL finals time, with the first hint of cricket to come. This year, like 2020, that feeling has been distorted by Covid.
Plenty of reasons have been advanced for September’s bad reputation with US markets, but the best is very simple – this week marks the end of the summer break in the US when many people go on holiday and do not pay as much attention to markets as they do in autumn, winter and early spring when many are inside in the US because of the weather.
It’s a bit of an old wives’ tale made redundant by the internet, the global nature of markets and the fact that the idea was based on ancient history when brokers and bankers were predominantly based in New York and New England (and Chicago) and were wealthy enough to take time off for summer holidays in The Hamptons on Long Island, in upstate New York or New England, in Europe or in Africa big game hunting or on safari.
According to investment analysis firm, CFRA, the key index, the S&P 500 has been positive just 45% of the time in September going back to World War II. The average 0.56% decline in the month is the worst of all months, with February the only other month with an average negative performance.
The S&P has advanced only 45% of the time in September, the lowest rate of any month, CFRA’s data showed.
The explanation is that after the break (and people do go on holidays in the US summer with schools and colleges closed), investors and analysts return to work and take a fresh view at stock values – especially in the wake of the June quarter and half year reports season that has just ended. Quite often that produces new valuations or changed views about the outlook.
US second-quarter earnings results were expected to be solid (because of thew weak comparative base a year ago in the first lockdowns), but easily expectations:
Nearly 90% of companies exceeded analyst forecasts, the highest such level of “beats” on record, according to Refinitiv data going back to 1994.
In Australia it was a similar story, but with one huge difference – the enormous boost from record iron ore and copper prices in the final months of the June year or half year and the rebound in oil prices, plus solid results from retailers large and small.
Macquarie said this week that “Thanks to Delta, Australia’s best earnings per share upgrade cycle in years is coming to a close.” There were more earnings beats (68) than misses (56) overall, it added.
Not for nothing did the two biggest collapses in US market history – 1929 and 1987 happened in October – about five or six weeks after the end of summer. Both were followed here, especially the October 19, 1987 collapse on Wall Street which happened on October 20 in Australia. A record collapse – more than 22%.
The end of summer story is the other half of the May adage about selling in May and going away (for the summer). Judging by the surge in US markets since then that certainly didn’t happen this year.
From May 1 to August 31, the S&P 500 rose 341 point or just over 8%, which is not to be sneezed at, nor is the 7.2%, or 509-point, rise in the ASX 200 over the same period.
Charles Schwab chief investment strategist Liz Ann Sonders told CNBC that it’s too simplistic to assume the market will follow history. “Are there a myriad of risks out there that at some point in time could be a risk factor that could lead to more than a 3% or 4% pullback? Absolutely,” she said. “Could it be in September? Sure.”
CNBC also pointed out that September’s slide is even worse when it falls in the first year of a presidential term. On average, the S&P 500 has declined 0.73% in those years. CFRA also found that in years where the S&P 500 set new highs in both July and August — like this year — the benchmark fell an average of 0.74% and rose only 43% of the time.
The S&P 500 was up nearly 3% in August and was closed out the final day of the month with a flattish performance. For the year, the S&P 500 is up 20.4% and has more than doubled in value since it most recent low on March 23, 2020.
The ASX 200 added 1.9% in August and is up 14.4% year to date.
And in nearly all cases, companies and analysts failed to property recognise why the June quarter, half and full year figures were so good.
Government and central bank intervention quelled the panic and flooded economies with trillions of dollars in cash – it wasn’t the brilliance of the business people, their advisers or bankers and brokers (with the possible exception of accounts and tax lawyers).
Led by The Federal Reserve in the US (and the Reserve Bank here) central banks cut interest rates to near zero and began pumping money into financial markets. Trillions of dollars in relief spending, subsidies, cheap loans for companies and households, cushioned economies from the worst damage and setting off the market’s climb from March, 2020 that continues.
