“Good investors gather information, put that information into current and historical context, then make sound decisions.”
Just when it appeared that the mid-July equity market correction was wrapped up, August opened with three sharp, consecutive daily declines. The S&P 500 Index (SPX) experienced a total decline of -8.0% in those three days. It then totally recovered that decline in the next two weeks and now sits back within 1% of the July highs, which are the all-time highs. The rollercoaster ride was not over!
This most recent correction took the SPX down by -9.8%, and qualified as a moderate correction. On average, this index experiences one moderate correction a year. The April ‘24 correction was a mild correction of -5.9% for the SPX, which averages three mild corrections per year. With all these corrections, one might wonder how there can be time left over for the markets to rise? Because over the years, the rise has been greater than the fall. Market corrections become more natural, less dramatic, and more like the changing seasons.
Some seasons, and some months, tend to be rougher on equity markets. The month of September has earned the reputation of being the roughest of them all. Since 1950 it has been the worst performing month of the year for the SPX, the NASDAQ, the Russell 2000, and the Dow Jones Industrial Average (DJIA). The average returns for all of these indexes in September have been negative. How negative? Not as bad as you would think, ranging from -0.7% to -0.9%. Certainly not enough to warrant exiting equity markets all together and waiting until…when exactly? And that is the catch. So, we just keep the seat belts buckled and wait for better roads. And without hesitation, that was a segue to another one of my ‘driving’ analogies.
Consider the months of August and September as ‘road construction’ months. Institutional investors are required to make quarterly reports on their portfolios. The vast majority of these reports are made consistent with calendar quarters. These institutional investors will often use the months of August and September to ‘clean up’ portfolios. By decreasing positions that have not been effective, and adding to positions that have been effective, portfolios get set up for their all-important year-end report. In addition, portfolio rebalancing can impact certain equity sectors.
This year, the Federal Reserve has the ability to be the star of the show, as interest rate cuts have been promised in September. Yet, we must never underestimate the market’s ability to be disappointed in the amount of the cut, or the number of cuts, or the timing of the cuts. And of course, there are always the ‘buy the promise and sell the news’ programs that can spark algo-trading, like we saw the first three trading days of August. In reality, there should be very few surprises from the Federal Reserve this year because of the Elections. The Fed has always maintained that they do not wish to become a ‘political tool’ in an election year. They normally maintain a judicious silence in the weeks around the election.
Historically, the 4th quarter of the year has been the most productive. This doesn’t happen accidentally. It happens because of the third quarter road construction and portfolio management techniques. Factor in the election, and the promise gets even sweeter. This is because equity markets historically fare well during election years. Regardless of who gets elected! Or who takes the House of Representatives, or the Senate, or both! Everything contributes to a process that has been working, for not just years, but for generations. Financial markets do not function well as a result of our politics. They function well in spite of our politics. I anticipate that this year will be no different.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
© 2024 Edward D. Foy. [email protected], www.foyfinancial.com.
Sources: StockCharts, Morningstar, Stock Trader’s Almanac.