This week we experienced what’s known as a corn moon: the full moon before the fall equinox, so named because agrarian societies celebrated the moon as a beacon during the harvest season. It also denotes that we are in the back-to-school season, which, this year, will be challenging for parents everywhere. Finally, it indicates a turn in the calendar to September—one of the worst months for the stock market and volatility. (Since 1950, the S&P 500 Index has averaged a decline of 0.5% during September).
The September Effect
There are many theories why September may lead to lower stock prices. Mutual fund tax-loss harvesting begins, as many funds have a September 30 year end; investors returning to work in force; and market trading volume picking up from the summer doldrums of August. Vacations are over, kids are back to school and parents are back to the trading desks.
In an election year like this one, the uncertainty of the election’s outcome certainly becomes starker for investors as we get within two months of election day in November. This year, one could argue, the uncertainty is much more significant given the differences in candidates and their policies.
We think the high level of uncertainty also reflects a return to fundamentals, as the momentum factor may wane and investors begin to look at how companies will perform more carefully.
This year, we believe September’s downward tendency could be exacerbated by the tremendous run-up the market experienced during the summer months, fed by the global liquidity pumped into markets by governments and central banks. Added to this is the tech stock rally as investors sought safe growth in the likes of Apple (+135% since the March low), Microsoft (+60%) and Amazon (+110%), each of which had tremendous rallies over the summer. Yesterday, I saw a research piece noting that Apple’s market value is almost equal to the German stock market, the fourth largest economy in the world!
While we acknowledge that these companies have fortress balance sheets, produce a tremendous amount of cash flow and benefit from secular trends in technology spending, their stock runs have belied their fundamentals.
Is Full Moon Trouble?
The large sell-off in stocks yesterday (the S&P 500 Index was down 3.5% and the tech-heavy NASDAQ Index was down 5%) could be a function of the September effect, kids going back to school, tech investors realizing they had bid these stocks too high and need to take profits, a return to looking at fundamentals and away from liquidity. Or it could be the full moon. I know that many people believe that things can be a bit stranger around the full moon.
We may continue to see stocks pull back. When investors feel most uncertain about the future for revenue and earnings growth, they tend to focus on those companies that are most clearly benefitting from the current environment. The big tech stocks mentioned earlier certainly fit in that category.
However, there are many sectors of the stock market that have not nearly had the run-up the leaders have had.
Economic uncertainty remains a large issue for investors, as the effects of the pandemic will continue to cause disruption for companies in many sectors. Still, we’ve seen manufacturing rebound as activity indexes posted this week were back in expansionary territory. We expect to continue to see improvement in economic data; however, we know that it will be quarters—not weeks or months—before we return to “normal” growth.
This morning’s unemployment report showed a return to work noting that payrolls increased by 1.4 million, more than three-quarters of that coming from the private sector. The unemployment rate is down to 8.4%, the lowest since the March shutdown. We have a long way to go, though. There were 24 million people who said they are not working because their employer closed or lost business due to the pandemic.
Election uncertainty will be with us until election day and perhaps beyond this year. This will add to volatility but shouldn’t be viewed as such a watershed event that should cause investors to forget about fundamentals of company performance altogether.
For our part, we have sought to take profit in those strategies that have performed best through normal rebalancing and added to strategies that have underperformed, sometimes by quite a bit, as they have become cheaper relative to our winners.
So, while it may feel like a full moon week, we will continue our focused approach, evaluation of the global economy and research on those strategies positioned best for what’s to come. And maybe a virtual incantation session at Stone Henge just to be safe!
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by Brian Andrew
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy to provide consistent, actionable investment solutions for our clients.READ MORE about Brian Andrew.