8/12/2013 5:45 PM ET|
September is stocks' cruelest month
The market is due for a correction. But even if it gets one, stocks should resume rallying once the immediate crises are addressed.
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.
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.
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.
On the sidelines
At the least, the two crises will, like the Federal Reserve's taper decision, suggest that the smart play is to move money to the sidelines since 1) it isn't possible to predict what will happen, 2) it's hard to imagine the market climbing as these two crises come rumbling down the track, and 3) it's tough to predict how far the market might fall.
My own prediction is that the market will stage a correction here. By definition, that's a drop of 10% or more. I think that's the likely dimension of a September drop on worries about the Fed and a Washington deadlock, based on the dimension of the drop in 2012 on the fiscal cliff fiasco and the length of time this rally has run without even a 10% drop. I can go back to September to November 2012 for that 7.2% decline or back to March to May 2012 for a 6.6% pullback, but I have to go all the way back to the 13.2% drop in July to September 2011 to find an honest-to-goodness correction. Rallies need corrections to reset prices, build new bases for further advances and convince money on the sidelines that now is the time to buy. We haven't had one of these events in a long time, and it's reasonable to think we're due for one.
On the other hand, I don't think the indicators are pointing to anything much worse than a correction for now -- and there's some chance we won't get to the 10% threshold but will instead see another 7% or so drop.
First, while we're due for a correction, we're not way, way overdue. The average time between corrections in bull markets since 1932 is 29.8 months, according to InvesTech Research. That's one every 2.5 years, and we're currently two years away from the September 2011 correction.
Second, even with the current very long rally to all-time highs, U.S. stocks aren't spectacularly overvalued. They are overvalued based on market history: On Aug. 9, the price-to-earnings ratio on U.S. stocks was 18.62 times trailing 12-month earnings. The average on the S&P since 1871 is 15.5, according to Yale economist Robert Shiller. So the current P/E ratio is higher than about 77% of past readings.
The good news is that the degree of overvaluation isn't at the extreme level we usually see before a drop greater than 10%. The bad news is that P/E ratios of this level are associated with very, very modest long-term returns going forward. If you used Shiller's cyclically-adjusted-price-earnings (CAPE) ratio -- currently above 23 and therefore higher than 90% of CAPE readings since 1871 -- the historical numbers say investors should look for average annual real (that is, above inflation) returns of just 0.9% over the next 10 years. (CAPE uses average inflation-adjusted earnings for the trailing 10 years in its calculations in order to smooth the business and market cycles.)
And, third, U.S. stocks have the advantage that there isn't a really attractive alternative to dollar-denominated equities. It's harder to take money out of U.S. stocks when European and emerging market equities don't offer an attractive alternative. (And whatever their recent performance, the volatility and track record of Japanese stocks make them just too scary to many U.S. investors.)
In my opinion, a bigger-than-10% drop waits on a combination of even higher U.S. equity prices, an economic slowdown that takes a bite out of projected earnings and a weaker dollar that is less attractive than alternative currencies.
The road ahead
So what am I expecting for September?
General nervousness, of course. That might be good for a 7% retreat all by itself.
A stronger dollar if the Fed indicates on Sept. 18 that a taper of asset purchases is due sooner rather than later. A stronger dollar would put an end to the recent rally in commodity and gold prices. On a technical basis, the dollar looks oversold and ready to bounce back against the yen and against commodities. I'd look to add to positions in Japanese equities on that kind of weakening of the yen. I'd hold off on purchases of commodities and commodity stocks until I saw how far a strong dollar bounce might go.
I'd also expect another retreat in bonds and other income-related assets, such as REITs (real estate investment trusts) and bank stocks, as investors overreact to an impending taper. I think income investors, and especially bond owners, have been beaten up sufficiently recently so their first reaction on anything like bad news from the Fed is likely to be to sell.
Another budget/debt ceiling crisis obviously wouldn't do wonders for the dollar. Events could raise the prospects for another downgrade of U.S. debt from the credit rating companies, and investors with the slightest doubt about the full faith and credit of the United States won't rush to buy Treasurys or other U.S. dollar-denominated assets.
But my suspicion is that the damage will be less than the rhetoric might lead you to expect. It is, frankly, unimaginable to most investors that U.S. politicians would destroy U.S. credit in a search for political advantage. So until the markets see such destructive stupidity actually at work, I think income investors and dollar traders won't react to the worst of their imaginings.
Any decline is likely to be tempered, too, by investors and traders who think that U.S. asset prices will climb again in November and December -- as they did in 2012 -- once the immediate crisis passes. With time, I think the bond markets will come to see their initial sell-off on fears of a modest rate of Fed taper on asset purchases as an overreaction. And I think a relief rally in late November or December would greet any news that Congress and Obama have found some way -- even one as stupid as the sequester solution to the last debt-ceiling crisis -- out of the current impasse, short of mutually assured destruction.
I don't think this magnitude of a correction and subsequent bounce solves the long-term problems in global financial markets caused by massive expansion of central bank balance sheets. It just leaves them for another day.
But until that day arrives, with its requirement for the aggressive pursuit of safe havens, I'd deal with the coming September madness by selling losers and taking profits in my portfolio now so that I had cash available for bargains in October and November.
When in 2010, Jim Jubak started the mutual fund he manages, Jubak Global Equity (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of June. For a full list of the stocks in the fund as of the end of June, click here..
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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VIDEO ON MSN MONEY
"The Obituary follows:
Obama: 127 million Romney: 143 million
The Democrat Party, with the licentious "leadership" of an incompetent fool, has achieved placing 47% of the population into government dependency, and has found ways to multiply their votes while subduing the votes of others. MHO!
Goodbye, USA. You were the greatest!
The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that “the buck stops here.” Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.
Obama's own words...
What's wrong? The Government is spending millions building bike parking racks cause it thinks it has a right to tell Americans to ride more bikes cause its better for M. These government feel they have to run everything, even 10's of Billions for bullet trains. Here is the American problem. Largest government hooplay ever in the histry of the USA. All B.S.
The roughly matches the comments made early in the 2000's by Warren Buffett who said the 9% returns of the markets in the 1900's would be replaced by 7.5% returns in the 2000's.
So somewhere along the line, 1 year, 10 years, etc. one can expect the S&P 500 P/E average to drop, costing returns for current stock owners, or else the P/E will stay high - again costing 1.3% in returns for stock owners.
So any way you look at it, the AVERAGE market is likely to return less than average.
This is one of those cases where value investing with relatively low P/E stocks should pay off better in the long run.
Yep! It may go up, it may go down.
It might be a little, it might be a lot.
Astute commentary, and I agree.
Now back to pressing issues, on the first tee. FORE!
Yes V_L the puppet heads (as we know) will spin,spin,spin and for what? They never did like to discuss outside of the Hollywood news at this board. And(!) I just had a chuckle as to the old pres. throwing that Hollywood party and thanking for the years of keeping America entertained!
'Stocks Cruelest Month?'
Good morning folks!
Why this is some funny stuff hey! And to think the sheeple are asleep at the wheel.......
And what do we SEE?
Well we SEE those such as ice cold sangria (from the msn refugee board) along with fat cat and a few others over this way still spinning the lie for so called personal so called profit in I am better than you greed land.
Why there was a time limit as to just how long things could be contained and that some things should have never been mixed together as far as that periodic table of elements goes. Most that are older and a bit wiser learned these things all the way back in middle school as teenagers.
Yes unfortunate as mum is the word and the top inventors of the MAIN daily writings come straight up from good old hollywood. So pretty hard for the people to SEE and understand what is going on as the drift in sending most off to Fantasy Island has been quite a acomplishment over the years.
Now we are to listen to the 50/50 puppet heads with the half truth club of deciet for cash cows of destruction?
And they just now admit yet when we spoke of the ongoing those and the likes of sprewed that it's all over,will be cleaned up shortly,and we don't know what the heck we are talking about. Well of course they would and for the outline as presented. After all,can't have those TBTF and BIG BANKS buying up their own with clickity-click from nothing called instant DEBT surpassing TRILLIONS and Quadrillion.
Yes we spoke of the TRUTH but few had time to pay attention and many that did mocked and ridiculed.
Idea! Sure! How about moving those that have right alongside the soon to be no more as we watch and the NEWS slowly comes about in Short Time.
TooT! TooT! Right on Schedule as we have been saying.
And can't enter links or the board don't accept? That is something.
Aug. 9,2013 - AP: ‘Time bomb’ in leaking Fukushima trenches — If Tepco removes extremely contaminated water as planned, it will only make more flow in since reactor buildings connect to trenches
Aug. 12,2013 - Over 15 quadrillion becquerels of radioactive substances suspected in trench that Tepco now admits is leaking into groundwater at Fukushima
Aug. 12,2013 - NHK Special Report on Fukushima: “We are still in an emergency… Not much time left… We can’t afford to wait” — Asahi: Fear of contaminated water overflowing from well that’s nearby trench leaking 3 billion Bq/liter into ground (VIDEO)
Aug. 12,2013 - Radiation Expert: Enormous amount of contamination flowing from Fukushima will probably imperil entire Pacific Ocean — Threatens other countries, food chain — Absolutely can reach U.S. and Canadian shores (VIDEO)
Aug. 13,2013 - TV: They are turning ground into quicksand at Fukushima plant — Engineers warn reactor units may topple (VIDEO)
Aug. 13,2013 - MSN: Nuclear experts call for testing U.S. West Coast waters and Pacific seafood for Fukushima contamination — “I definitely recommend FD
July 3,2013 - RT NEWS / Why the media is not reporting the truth on Fukushima?
TooT! TooT! As according to Elliot Wave we are at the bottom and need a new wave for the future. Then again we have spoke more than once as to mimicking and that of the k-wave.
ZEEBART that is a GREAT summary.
The puppet pumpers are hard at work! Nothing changes yet,
excerpt - Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.
sources / zerohedge & washingtonsblog
Yes those 50/50 spin pumpers are having to spew overtime to keep up with the mess of it all.
Good morning folks!
Catching the latest spin job? Why the spin is back to back from a little better than a week ago concentrating on the same sales pitch,
Aug. 14,2013 -
excerpt: The Swiss franc slid to the weakest in a month against the euro after a report showed the 17-nation region pulled out of recession last quarter,
That's some FUNNY stuff as,
July 16,2013 - Chart of the Day: Unemployment in Europe Is Catastrophically High and Still Getting Worse
and that is not to mention back here in town,
July 5,2013 -
excerpt: • Full-Time Employment Plunged by 240,000 in June
• Economic Issues Accounted for 75% of Gain in Part-Time Employment
• Number of Short-Term Discouraged Workers Increased by 247,000
• June Unemployment: 7.6% (U.3), 14.3% (U.6), 23.4% (ShadowStats)
• Payroll Gains Were Warped Heavily by Inconsistent Seasonal Factors
Msn Refugee Board 2 / The Decoy409 POST
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