The economy is slowing, again, home sales appear to be dipping and stocks are on a long slide, and now we are in what is traditionally the worst month in the market: September.
Could stocks be headed for another September swoon?
“If history is any guide, for it’s never gospel, we may be in for another rough ride,” says Sam Stovall, chief investment strategist at Standard & Poor’s.
Mutual fund managers tend to clean house after Labor Day, taking profits on winning stocks and weeding out portfolios before putting out the rosiest possible end-of-quarter reports for their clients.
No month has brought worse results in the stock market than September. Here is the average monthly price change, from 1950 through July 2010, for the S&P 500 index. Months are listed from best performance to worst:
- December: 1.6% gain
- November: 1.6% gain
- April: 1.5% gain
- March: 1.2% gain
- January: 1% gain
- July: 1% gain
- October: 0.6% gain
- May: 0.3% gain
- August: 0.1% gain
- June: 0.04% loss
- February: 0.2% loss
- September: 0.6% loss
Source: Stock Trader’s Almanac
Workers coming back from summer breaks are also inclined to sell stocks as they get their financial affairs in order. This includes everyone from the San Diego contracts attorney to the commercial mortgage brokers. Any festering issues with the economy or stocks during the summer, when trading volume is light, tend to get put off until fall.
The result: September is usually a dog of a month for the market. It typically starts with solid market increases, then tails off, says Jeffrey Hirsch, editor-in-chief of the Stock Trader’s Almanac.
“There’s just a general selling bias in the month of September,” he says.
Four times in the past decade alone, the S&P 500 shed at least 5% in September. The average September decline since 1950 is 0.6%, according to the Stock Trader’s Almanac. February is the next worst, with an average 0.2% loss, and December and November are the best, averaging 1.6 percent gains.
Of course, investors haven’t forgotten that the financial world collapsed in September just two years ago. And the Sept. 11 attacks, which delivered a devastating blow to the stock market, remain a painful memory.
This year, there’s a lot to frown about. The S&P 500 index is down 14% from its high in April, and was down 5% for the month of August.
Stocks have fallen because the economic recovery is faltering. The economy has slowed to anemic growth, home sales the last three months are the worst on record, consumer spending is lackluster and unemployment is stuck near 10%.
The slew of weak economic data sapped the market of what little midsummer momentum it had and further shook the confidence of already wary investors.
“I don’t think it would take a whole lot to get investors to start selling and consumers to start pulling back again,” says Mark Zandi, chief economist at Moody’s Economy.com. “The collective psyche is on edge.”
Federal Reserve Chairman Ben Bernanke said last week that the central bank is ready to take additional steps to boost the economy, including buying more debt or mortgage securities in order to keep interest rates low.
But with the benchmark interest rate already near zero, any Fed action is unlikely to provide the oomph of past measures. Congress doesn’t appear to have an appetite for another stimulus package.
Also hanging over the market is an air of heightened uncertainty because the November elections will determine which party controls Congress for the next two years. The S&P 500 has declined an average 1.7 percent in the September before midterm elections since 1930.
Not that September isn’t bad enough already without all of this year’s baggage. It’s one of only three months, along with February and June, when stock prices typically decline.
The uncertainty is a serious consideration for financial advisers such as Dominick Vetrano of Fountainhead Financial in Chicago. He holds off putting more money into stocks beginning in August, even though he thinks the September market dips are usually psychological.
“There is little to gain by investing right before September and a lot to lose, so why risk it?” he says. “The September effect is well-documented.”
MY TAKE: Although news reports show a rise in both residential and commercial mortgage loans applications, there are still no real clear signs of a solid recovery for the housing market, yet. I’d be willing to bet that every small business, too, from the small Blackberry repair service provider to the New York tax preparation firm will be cutting more corners, possibly not laying off workers, but definitely not hiring any more of them, and looking for ways to boost business without making any expenditures. If I were a small iPod repair company or a tax preparation firm I imagine I’d be thinking about ways to streamline too, as it looks like we are in for a protracted recession.
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