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.
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. However, a 4.8% drop is modest by historic 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 traditional measures.
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.
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.
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 significantly the past several weeks. 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.
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.
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. 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. These are likely the biggest reasons for the pullback last month.
Final thoughts
We’re overdue for at least a 10% correction. We know they tend to be unpleasant, but they are part of the investment landscape.
With all but the most aggressive and risk tolerant investors, we recommend a healthy portion of fixed income investments. Consider adding a mix of bonds into the portfolio to help manage portfolio risk. While you may not see the extreme highs when stocks are rising, mixing in fixed income strives to reduce your risk on the downside when equities turn lower.
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.
Let me emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.
As always, our team is honored and humbled that you have given us the opportunity to guide your families.
October 2021
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
