Can't We Just Skip September?

Last week wasn’t a good one for stocks but, as I mentioned in a recent post, September is usually a volatile month so some bumpiness is to be expected. Major market indexes were down from about 3% to nearly 6% for the week with the largest losses impacting small companies and big tech names most. These were also areas of the market with the highest returns lately. The more broadly-based S&P 500 was down a little over 4%. Bonds were up a percent or so and that helped soften the blow for investors with portfolios containing bonds.

It can be helpful to put short-term market volatility into broader context. The S&P 500 is up better than 14% year-to-date, better than the Dow’s 9% and the NASDAQ’s 12%. Core bonds are finally posting positive returns this year, up around 4% or so depending on the index. And foreign stocks are up in the mid-single digit range. So it’s been a good year but market seasonality is amping things up a bit as usual. Add the election calendar and Fed policy expectations to the mix and, again, volatility should be expected.

For some historical context, my research partners at Bespoke Investment Group looked at S&P 500 performance since markets started trading five days a week in 1953. Last week was the worst start to September on record. There have only been four other times when the broad market benchmark declined by more than 2.5% in the first week of September. Why does that matter other than to demonstrate it doesn’t happen very often? One week doesn’t make a trend but it’s interesting market trivia anyway.

Going further, Bespoke looked at the same 1953 start year but from the second week of September to see how markets have fared during that month and through the fourth quarter. They found that the S&P 500 was up 76% of the time with average cumulative gains of over 4%. Notable losses occurred during this historical timeframe such as Black Monday in October 1987, when the Dow index lost 23% in a day. The onset of market meltdowns in September 2008 related to the Great Recession also marred the timeframe. Otherwise, September has tended to be weak and volatile but the final three months of the year often make up for it.

That said, I don’t want to overstate this. I recall plenty of times when the last few months of the year felt nasty related to trade wars, Fed policy, and various other causes of market anxiety. And I’ll never forget the “coming unglued” nature of late-2008. However, those market events were juiced up by excessive leverage and complex/risky trading strategies, global trade issues, a US and/or global economy on the rocks, and rising interest rates. Depending on one’s opinion our current environment has excesses, such as lofty valuations in some parts of the market, but we’re in a much better place than back in 1987 and 2008.

Market volatility can be disconcerting, especially when it seems to come from nowhere. We should always prepare our portfolios and minds for all eventualities but remember that volatility goes both ways. Major market indexes were up yesterday and again as I write this morning, without a major positive catalyst other than prices being down last week. We’ll see how this week pans out but we have to think beyond just the next few days, of course.

I’ve mentioned this numerous times before but it bears repeating: As long-term investors we need to deal with seeing our statement values bounce around, sometimes quite a bit, as we grow our wealth. Growth will happen but you have to give it time.

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