As in Vegas, just as fortunate gamblers start having a good time at the craps table, the designated “cooler” heads over and spoils the party for everyone (save for the house). The cooler air of September has frequently had a chilling effect on stocks, just as investors have enjoyed some winnings over the first eight months of the year. After the meltdown in the financial markets last fall, it would be impossible for investors to ignore the changing seasons which coincided with a disastrous period for investors last year. However, a closer look at the past returns reveals a bit more benign month than some of the doomsayers might have us believe.
True, September has historically offered the poorest monthly returns for stocks, with an average -0.96% return for the month over the past 100 years for the Dow Jones Industrial Average. February is the only other month with average returns in negative territory for the DJIA over the past 100 years. Another truth is that only 58% over this time period has September shown a loss, which alternatively means that 42% of the time September shows a gain. So in order for a reversion to the mean, last year’s 6% loss would theoretically need to be balanced out with a 5% gain this year. Obviously, this sort of logic is not statistically relevant, but the point is that each and every September we don’t expect 10% corrections.
Markets typically like to confound the majority. Perhaps because of the recent past (i.e., last fall), there has been in inordinate amount of speculation regarding an impending major market correction during this September. While this prognostication strikes fear into investors’ hearts as more and more anticipate such happenings, it seems that the likelihood of such an event becomes less and less.
The fact that investments have recovered significantly can encourage investors to take some profits solely based on the feeling of relief felt by higher stock prices. Most of the economic statistics continue to point towards a moderation in the slowdown, with some of the manufacturing data signaling pretty good growth on the horizon. Not to mention that most economists are now predicting positive economic growth in the 3rd and 4th quarters of 2009. However, employment data still remains the most persistent negative economic component. August saw yet another drop in jobs of 216,000, although that figure was far better than the 691,000 average reported during the 1st quarter of 2009.
As we have pointed out, it is very common for stocks to move higher and for manufacturing and corporate earnings to show improvement long before job growth returns to the economy. Employers of all stripes tend to require more productivity from current workers as a recovery begins. It’s not until an economic recovery is well established that hiring additional employees becomes essential and worth the risk to those employers. The unemployment picture will continue to exert negative force on consumer spending and confidence until there is finally job growth again.
The overall stock markets posted monthly gains yet again in August. The DJIA gained 3.8%, the S&P 500 rose 3.6%, and the NASDAQ added 1.6% while small cap stocks gained 2.9% for the month of August. International markets were somewhat mixed as the developed international markets gained 4.50%, while emerging markets lost 1.31% for August. Emerging markets and the NASDAQ continue to be standouts for the year, gaining 42.5% and 28.2% respectively, for all of 2009. The S&P 500 has gained a workman-like 15% from the beginning of the year through August 31st.
The financial sector rose 13% while beleaguered real estate stocks gained a staggering 19% just during the month of August. The financials were the standouts during August, and drove the markets higher even in the face of some deteriorating sentiment. The banks continue to look stronger as many including Bank of America and Citigroup have bolstered their capital positions, albeit at the expense of diluting previous shareholders’ positions. Commodities and commodity stocks were flat to down slightly for the month of August. Weakness in the commodity markets helps to explain why the emerging markets, some of which are heavily dependent on commodity production, were a bit weaker than other areas.
Bonds have surprised as yields for U.S. Treasury bonds have moved lower again this month. The 10-year U.S. Treasury bond yielded 3.40% as the 30-year U.S. Treasury bond yielded 4.18%. Both of these benchmarks are well below the highest rates reached in June of 2009 for the year. Many would have thought, with some certainty, that rates would continue to climb as the U.S. government continues a policy of deficit spending, prospects for future economic expansion increase and future inflation expectations also become more certain. We will continue to monitor the situation here as there are many interesting crosscurrents.
As we have pointed out, many have argued that the current rally has run too far, too fast and that a correction is imminent. A reflection on the past eight months may put the current rally in slightly different perspective. We have heard the bottom in March characterized as a false bottom – meaning the market was discounting catastrophic situations in March that were never likely to take place. When the Dow reached 6,500 and the S&P 500 achieved a devilishly low 666, the markets appeared to be discounting additional major bank failures and/or a significant nationalization of the banking sector. Of course this was unlikely given the already substantial support provided to the banks by the government.
Some politicians and economists theorizing about the possibility of major nationalizations on the widely followed Sunday morning talk shows fueled some of this speculation. The Obama Administration, Treasury Department and Federal Reserve never hinted that it was even a possibility to wage a large scale nationalization of the banking system. In our view, the persistent rumors and fear drove the markets to irrational bottoms. Without the fear and rumor mongering, where would the bottom have been?
The late November lows look like an obvious candidate at would should have been the lows. Fear was high, but speculation that the government would take the initiative or be forced into taking over major portions of the banking sector remained at appropriate levels. While the markets have rallied significantly from these November lows, the rally also looks to be more appropriate with the S&P 500 gaining 33%, while the DJIA has advanced an even less pronounced 23% since November. In this context, the current rally feels a lot more sustainable than the 50% run since the March false bottom.
True, September has historically offered the poorest monthly returns for stocks, with an average -0.96% return for the month over the past 100 years for the Dow Jones Industrial Average. February is the only other month with average returns in negative territory for the DJIA over the past 100 years. Another truth is that only 58% over this time period has September shown a loss, which alternatively means that 42% of the time September shows a gain. So in order for a reversion to the mean, last year’s 6% loss would theoretically need to be balanced out with a 5% gain this year. Obviously, this sort of logic is not statistically relevant, but the point is that each and every September we don’t expect 10% corrections.
Markets typically like to confound the majority. Perhaps because of the recent past (i.e., last fall), there has been in inordinate amount of speculation regarding an impending major market correction during this September. While this prognostication strikes fear into investors’ hearts as more and more anticipate such happenings, it seems that the likelihood of such an event becomes less and less.
The fact that investments have recovered significantly can encourage investors to take some profits solely based on the feeling of relief felt by higher stock prices. Most of the economic statistics continue to point towards a moderation in the slowdown, with some of the manufacturing data signaling pretty good growth on the horizon. Not to mention that most economists are now predicting positive economic growth in the 3rd and 4th quarters of 2009. However, employment data still remains the most persistent negative economic component. August saw yet another drop in jobs of 216,000, although that figure was far better than the 691,000 average reported during the 1st quarter of 2009.
As we have pointed out, it is very common for stocks to move higher and for manufacturing and corporate earnings to show improvement long before job growth returns to the economy. Employers of all stripes tend to require more productivity from current workers as a recovery begins. It’s not until an economic recovery is well established that hiring additional employees becomes essential and worth the risk to those employers. The unemployment picture will continue to exert negative force on consumer spending and confidence until there is finally job growth again.
The overall stock markets posted monthly gains yet again in August. The DJIA gained 3.8%, the S&P 500 rose 3.6%, and the NASDAQ added 1.6% while small cap stocks gained 2.9% for the month of August. International markets were somewhat mixed as the developed international markets gained 4.50%, while emerging markets lost 1.31% for August. Emerging markets and the NASDAQ continue to be standouts for the year, gaining 42.5% and 28.2% respectively, for all of 2009. The S&P 500 has gained a workman-like 15% from the beginning of the year through August 31st.
The financial sector rose 13% while beleaguered real estate stocks gained a staggering 19% just during the month of August. The financials were the standouts during August, and drove the markets higher even in the face of some deteriorating sentiment. The banks continue to look stronger as many including Bank of America and Citigroup have bolstered their capital positions, albeit at the expense of diluting previous shareholders’ positions. Commodities and commodity stocks were flat to down slightly for the month of August. Weakness in the commodity markets helps to explain why the emerging markets, some of which are heavily dependent on commodity production, were a bit weaker than other areas.
Bonds have surprised as yields for U.S. Treasury bonds have moved lower again this month. The 10-year U.S. Treasury bond yielded 3.40% as the 30-year U.S. Treasury bond yielded 4.18%. Both of these benchmarks are well below the highest rates reached in June of 2009 for the year. Many would have thought, with some certainty, that rates would continue to climb as the U.S. government continues a policy of deficit spending, prospects for future economic expansion increase and future inflation expectations also become more certain. We will continue to monitor the situation here as there are many interesting crosscurrents.
As we have pointed out, many have argued that the current rally has run too far, too fast and that a correction is imminent. A reflection on the past eight months may put the current rally in slightly different perspective. We have heard the bottom in March characterized as a false bottom – meaning the market was discounting catastrophic situations in March that were never likely to take place. When the Dow reached 6,500 and the S&P 500 achieved a devilishly low 666, the markets appeared to be discounting additional major bank failures and/or a significant nationalization of the banking sector. Of course this was unlikely given the already substantial support provided to the banks by the government.
Some politicians and economists theorizing about the possibility of major nationalizations on the widely followed Sunday morning talk shows fueled some of this speculation. The Obama Administration, Treasury Department and Federal Reserve never hinted that it was even a possibility to wage a large scale nationalization of the banking system. In our view, the persistent rumors and fear drove the markets to irrational bottoms. Without the fear and rumor mongering, where would the bottom have been?
The late November lows look like an obvious candidate at would should have been the lows. Fear was high, but speculation that the government would take the initiative or be forced into taking over major portions of the banking sector remained at appropriate levels. While the markets have rallied significantly from these November lows, the rally also looks to be more appropriate with the S&P 500 gaining 33%, while the DJIA has advanced an even less pronounced 23% since November. In this context, the current rally feels a lot more sustainable than the 50% run since the March false bottom.
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