“Good investors gather information, put that information into current and historical context, then make sound decisions.”
The S&P 500 Index (SPX) opened September with its third correction of 2024. As a quick refresher, the first correction of the year was the -5.9%, 7-day, mild correction back in April of this year. The SPX was fully recovered over the next two weeks. The second correction started mid-July and saw the SPX decline by a moderate -9.8% in 14 days. It, too, then proceeded to fully recover over the next two weeks. The third and most recent correction fell entirely within the first week of September when the SPX dropped a mild -4.2%. It, too, was almost entirely recovered the following week as equity markets climbed higher the rest of the month. An average year would have one more mild correction in store before Christmas.
September has been productive for equities with eight of the eleven primary industrial sectors gaining ground. The top performing sectors reveal some uncommon bedfellows, with the S&P Telecom Index up +7.49% MTD, and the S&P 500 Utilities Index up +6.15% MTD. It is unusual for these two sectors, normally juxtapositioned from each other, to both be on the podium at the same time. The two weakest performing sectors in September have been energy and healthcare, again, strange bedfellows. The S&P Energy Index is down -3.58% MTD, and the S&P Health Care Index is down -2.38% MTD. These odd pairings are a good indication of the level of portfolio rebalancing that has taken place this September.
The biggest story of the month has been about interest rates. The Federal Reserve lowered their target for short-term rates by one-half of one percent, surprising a majority of investors with the size of their first rate cut. Equity markets responded positively, as most of the end-of-quarter portfolio preparation appeared to be in place. Perhaps this is why July and August were so volatile, as institutional investors started early so the table would be set for the Federal Reserve’s decision in September. The Fed’s forward-looking comments were also encouraging and included the possibility of an additional half-point cut before year-end.
The interest rate cuts were highly anticipated, so why all the fuss? Because of the size of the initial cut. A more conservative rate cut would have indicated that the Fed still had some concerns on the strength of the economy. The Fed tells us that they are closely monitoring employment numbers as an indicator of that economic strength. This is actually a new role for the Federal Reserve, as they attempt to plot a course ahead. Before COVID, the Fed was more driven by bank lending demand. The Federal Government’s response to the COVID Crisis included creating and pumping trillions of dollars of stimulus money into the economy. Those excess funds essentially put the Fed in a leading role rather than a following role with respects to interest rates.
All of the normal wild cards are still in the deck. Computer algo-trading is also alive and well, as we have seen during all three corrections this year. An interesting development with algo-trading is that the recovery periods are significantly shorter after the rapid sell-offs. Its almost as if the process acts like a sort of shock absorber for corrections. They are over quickly and neatly, and with less collateral damage.
We are entering the ‘sweet spot’ on the investment calendar. It is well-known that the 4th quarter of the year has historically been the most productive, and for logical reasons. It is also well-established that we continue to be in a long-term Bull Market for equities, both in the U.S. and globally. We believe that this is the most important macro-view for investors at this juncture. Market volatility is higher, but the trend is also higher, so potential outcomes remain promising. Bond markets are responding in a predictable and positive manner to the rate cuts. The net result is that much of the drama, and much of the perceived risk for investors, has been reduced, at least for the time being.
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.