TS Eliot was wrong. September, not April, is the cruellest month for investors. The S&P 500 has risen in this month just 45pc of the time since the Second World War. February is the only other month that has also delivered a decline on average over that period and it’s been less than September’s 0.56pc fall. October has hosted the famous crashes (in 1929 and 1987) but they are outliers – history suggests that most years the northern hemisphere’s autumn wobble has passed by then.
No-one knows why the ninth month is so poor for global stock markets. The glass just seems half empty at this time of year. Maybe it’s just a statistical quirk, with the average skewed by a few very poor performances.
The numbers are actually worse in the first September of the Presidential cycle. Again, it’s not clear why this should be the case. Perhaps it’s the end of the honeymoon period. The new President has had enough time to make his first mistakes, to have his Kabul moment. And when the market has hit a new high in both July and August – as it has this year – the averages are worse still.
Even if you disregard this kind of seasonal analysis, there are at least four more concrete reasons to worry this year. First, policy. The Fed has made it clear that the taper is on its way. Next week, we will likely hear that the US central bank’s purchases of bonds will start to wind down in November. That will pave the way for interest rates to start rising towards the end of next year. The market has been well prepared for the tightening, but it won’t like it when it comes.
Second, Covid. The US is experiencing a dramatic fourth wave, with the percentage of hospital beds occupied by Covid patients rising from 2.2% in June to 13.9% today. The good news is that this has not translated into many new restrictions – Goldman Sachs calculates a lockdown index which stands at just 8 compared with 27 last December and 54 in March last year. But the spectre of another winter resurgence hangs over the market.
Third, inflation. US consumer prices are rising faster than at any point in the last 13 years and this week the headline rate of growth held up above 5%. Things are not as bad over here, but yesterday’s data showed they are getting worse. The labour market is tight. Supply lines are stretched. Price rises look a lot less transitory than they did.
The final reason to be concerned is that until very recently, no-one seemed very worried by any of this. The stock market has risen for seven months on the trot. It has doubled in 18 months. You can find the numbers to justify this. Compared with two years ago, the revenues of America’s biggest companies have risen 15% and their earnings by 28%. That’s remarkable in the circumstances, but the market is 50% higher than it was in September 2019. The good news has not passed investors by.
So why am I not more concerned? Largely because the longer I watch the markets the more I accept that it is a waste of emotional energy, and financially unhelpful, to worry about the short-term ups and downs. Yes, there are times when the sensible thing is to take cover and get out of the market completely. But they are extremely rare. There have been just two in my adult life.
The rest of the time, the risk of being on the side-lines and (inevitably) failing to get back in is just too great. The reality is that we spend quite a lot of time below the most recent peak in the market, in some kind of a correction. Since 1900 – and sorry the data is American again, they just do it better – shares have been up to 5% below the high for the previous two years on nearly two thirds of trading days. Half the time, the market has been between 5% and 10% down. And two days in five it’s been between 10% and 15% lower.
Context is important. Market corrections during bull markets tend to be shorter and shallower than those in bear markets. And they bounce back more quickly. So, it matters that history suggests we are in the middle of a secular bull market to rival those in the 1950s and 1960s and then again in the 1980s and 1990s. Deviations from the upward trend now should be short and sharp, as they were in both those periods.
Why do I think we are still in a long-run bull market and not approaching the peak? Because the structural drivers of the remarkable gains since the 2009 low are still in place. First, the move into retirement of the boomer generation is still running and will do so for another five to ten years. That is fuelling a search for income that only the stock market can provide in a persistently low-interest rate environment.
Second, those low interest rates are here to stay. The long-term trend is down and the Japanese model, ten years in advance of our own, is a cautionary tale for anyone who believes we are on the cusp of an inflationary boom in defiance of the world’s massive debt burden.
Third, the large growth stocks that are driving the market higher are continuing to deliver the cash flow that investors are demanding. When you measure share prices against total cash returns, from dividends and share buybacks, the market remains well below the peak valuations in 1968 and 2000. As Eliot also said: ‘all shall be well, and all manner of thing shall be well’.
