A Predictable September

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

September didn’t miss a beat in fulfilling its annual market correction. It was a mild correction that took   three weeks to complete, with only one exciting day, before recovering most of the lost ground in the following week. As we said previously, highly predictable, and hardly newsworthy. As of this date, most of the major U.S. equity indexes are lower by less than 2% for the month, and holding their long term trendlines.

Last month we discussed the September ‘housecleaning’ that institutional investors regularly engage in. Characteristically, this involves selectively selling positions that have not been performing well, and selectively buying positions that have been performing well. In effect, punishing the losers, and rewarding the winners. The catch this year is that there just aren’t very many losers. Still, it is a required chore in the institutional investor universe. If you don’t have poor performers to pick one, you can still do a ‘portfolio rebalancing procedure’ which involves selling to a model, raising short-term cash, then reinvesting that cash back into the model positions before the end of the month. It sounds like a lot of work, which it is, but it’s an exercise that nonetheless demonstrates that institutions are paying attention, and sticking to the script.

The hallmark of portfolio rebalancing is when, during the selling process, most of the sectors decline by approximately the same percentage. There are very few, if any, outliers. The cash that is raised during the selling process is stashed in very short-term bonds, usually U.S. Treasuries, which can absorb all of the cash and barely budge. That hardly makes a ripple in the bond market, especially if the cash is then reinvested before the end of the month, which has been the case thus far this September.

The magic number for the declines in large cap equities this September was -5.4%. The S&P 500 Index declined -5.4% before bouncing. The Dow Jones Industrial Average declined -5.4% before bouncing. The NASDAQ Composite Index declined -5.5% before bouncing. The Russell 3000 Index declined -5.4% before bouncing. This was not a coincidence, but carefully engineered institutional portfolio selling, as was the recovery buying. Currently, the S&P 500 Index is down -1.4% MTD. The Dow Jones Industrial Average is down -1.5% MTD. The NASDAQ Composite Index is down -1.3% MTD. And the Russell 3000 Index is down -1.3% MTD. Market volatility was slightly higher in MidCap and SmallCap equity indexes.

Another telltale sign of portfolio rebalancing is the action, or lack of action, in the bond markets. If this was a major rotation out of equities and into bonds, the action would be reflected in a stronger bond market. Nope. The Bloomberg Barclays U.S. Aggregate Bond Index is down -0.47% MTD. The Bloomberg Barclays Municipal Bond Index is down -0.23% MTD. The Bloomberg Barclays 1-3 Month T-Bill Index is flat at 0.00%. Not even a ripple.

International equity markets trailed U.S. equity markets into the correction, and are trailing on the recovery. The MSCI EAFE Index is down -0.52% MTD, while the MSCI Europe Index is down -2.21% MTD. Emerging markets continue to under-perform, with the MSCI Emerging Markets Index down -3.10% MTD, and is now the only equity index we monitor that is in negative territory YTD, down -0.35%. Global distribution delays are impacting both international and domestic equity markets.

The setup for the 4th quarter of 2021 is looking good. The global Bull Market is intact, with U.S. equity markets firmly in the lead. Corporate earnings projections are positive. Interest rate increases are still off the table until 2022. Inflation factors are being priced into projections in spite of the Fed’s lack of response to date. This is still a favorable environment for equities, looking into the beginning of 2022. Then we shall see. 

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2021 Edward D. Foy.   ed@foyfinancial.com, www.foyfinancial.com

Sources: Bloomberg.com, Marketwatch.com, StockCharts.com, Morningstar.