What is it about September?
September has historically been the worst month for stocks, according to St. Louis Federal Reserve data measuring monthly S&P 500 performance over the last 50 years. If you are wondering whether the trend has abated in recent years, the answer is no, it hasn’t. Over the last 10 years, September performance has been substandard.
While analysts have offered various explanations, no one has pinpointed the reason we sometimes see seasonal weakness as summer concludes.
Look no further than the table of Key Index Returns. The S&P 500 Index fell 4.8% in September. It was the first monthly decline since January and the worst decline since March 2020 when the lockdowns began.
Peaking at a new record on September 2, the broad-based S&P 500 Index began a pullback that can be tied to a number of factors.
Before we continue, a 4.8% drop is modest by market standards. In fact, we’ve yet to shed 10% since the bull market began in late March 2020, which would be considered a “correction” by analysts.
So, what’s behind the sell-off last month?
The economy is not contracting, and a moderation was expected after Q2’s 6.7% annualized growth rate (U.S. BEA), but the slowdown has been more pronounced than expected.
The Atlanta Fed’s GDPNow model, which incorporates economic data that impacts GDP, suggests that Q3 growth is tracking at just 2.3%. This would include Q3 data released through October 1. That means all of July, most of August and none of October’s data have been inputted into the model.
While profit growth has soared coming out of the lockdowns, per Refinitiv, a more pronounced moderation in profit growth may be on tap.
Next question, why is Q3 disappointing on the economic front? Well, the spike in Covid cases is causing some hesitation in industries that are dependent on face-to-face transactions. But there is good news on this front. The CDC says cases have slowed recently. We’ll see how this continues to play out later in the fall. While bank deposit data from the St. Louis Federal Reserve suggest consumers have plenty of spendable cash in reserve, the influx of new stimulus money has dwindled, and spending has slowed. We’re also seeing stubbornly high inflation in some industries, as supply chain bottlenecks aren’t fixing themselves.
Consider the title of this Wall Street Journal story from late August:
Why the Supply Chain Still so Snarled? We Explain, With a Hot Tub.
Utah manufacturer Bullfrog Spas depends on a complicated network to bring materials from across continents and oceans. The pandemic put it out of whack.
That sums up the problem for many manufacturers.
As Fed Chief Jerome Powell noted at the end of September, bottlenecks and shortages of key raw materials are “not getting better—in fact at the margins (they are) apparently getting a little bit worse.”
Like severe labor shortages, supply chain problems are crimping profitability, limiting sales, raising prices and hampering economic growth. Investors are taking note.
An uptick in bond yields near the end of the month also dampened sentiment. While yields remain quite low, they ticked higher after the Federal Reserve took on a slightly more hawkish tone at the September 22 meeting.
These are probably the biggest reasons for the pullback last month.
Not to be Debbie Downer, but let’s look at a few more.
The debate over the debt ceiling is taking shape. The U.S. Treasury has said it will run up against the current debt ceiling on October 18. That means it can no longer borrow to fund operations, and the U.S. would default on its debt unless Congress extends the ceiling. Congress is considering raising the ceiling slightly, “kicking the can down the road,” to December of this year.
As Moody’s Analytics recently noted, “The debt ceiling will be raised. Not doing so would be catastrophic for the economy, so this is an extremely low probability event.”
We’ve seen this drama play out before, and lawmakers avoided sailing into uncharted waters. Still, it’s causing some headline anxiety.
China’s largest and most indebted property developer is on the brink of bankruptcy. While Western financial exposure is likely limited, a disorderly default could create big problems for the world’s second-largest economy.
Finally, an energy crisis is brewing in Europe, while natural gas prices hit new highs in Asia. They are running about six times what we see at home (Reuters).
The U.S. isn’t directly affected, but these are costs that may get added to manufactured goods or could restrict output, adding to supply chain woes.
We’re overdue for at least a 10% correction. We know they tend to be unpleasant, but they are part of the investment landscape.
As we’ve noted in the past, stocks tend to take the stairs up and the elevator down. If we are headed toward an overdue correction, pullbacks tend to be short lived.
I trust you’ve found this review to be educational and informative.
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