There is something I always enjoy about September. Even though the temperatures don’t always cooperate, September feels like the beginning of fall. The kids are back in school, football is underway, the days are getting shorter, and you start thinking about cooler evenings, changing leaves and everything that comes with fall in Missouri.Of course, Missouri has a funny way of reminding us that the calendar doesn’t always tell the whole story. This week, we’re looking at temperatures pushing 98 degrees. So much for fall.
The stock market can be a little like Missouri weather. What the calendar says is coming and what we’re actually experiencing don’t always line up. As we enter September, investors are being reminded that this has historically been the weakest month of the year for stocks. The S&P 500 got off to a rough start this month, falling 0.7% on the first trading day. At the same time, the 10-year Treasury yield climbed toward 4.8%, while concerns about inflation, the Iran conflict, oil prices, and the Federal Reserve’s next move have increased.
There are some legitimate reasons for investors to be cautious. Since 1950, September has produced an average decline of roughly 0.6% for the S&P 500 and has historically been its weakest month. Midterm election years can also bring additional volatility. However, I don’t think that means investors should automatically assume a major selloff is coming. In fact, two important pieces of the traditional bearish argument may be missing this year.
First, there is the political picture.
Midterm elections can create uncertainty about taxes and government spending. Current expectations point toward the possibility of divided government following the election. That could actually limit the likelihood of major changes to tax policy or federal spending. Divided government can create plenty of political frustration, but it can also make sweeping legislation more difficult to pass. The election will certainly be important, but investors may not have as much policy uncertainty to worry about as they have during some previous election cycles.
Second, and perhaps the more important factor, corporate earnings.
Companies have been reporting surprisingly strong profits. LPL Research recently noted that second-quarter S&P 500 earnings growth was tracking above 30%, with earnings strength becoming increasingly broad across the market. That’s important because, eventually, stock prices have to be supported by corporate profits. AI continues to drive enormous investment from some of the world’s largest companies, but investors are beginning to see the capital expenditure translate into revenue and earnings growth as well.
That doesn’t mean stocks can’t fall. They absolutely can. The bigger concern right now is interest rates.
The 10-year Treasury yield is approaching 5%, and markets have dramatically increased the odds of a Federal Reserve rate hike this month. At the same time, renewed conflict involving Iran has pushed oil prices higher, creating another potential source of inflation. Higher oil prices can lead to higher inflation. Higher inflation can keep interest rates elevated. And higher interest rates can put pressure on stock valuations. That’s the part of the market I am watching most closely.
The S&P 500 has still gained more than 11% this year despite the recent weakness. After a strong run like that, a 5%, 8% or even 10% pullback would not necessarily be unusual. That’s an important distinction. A market correction doesn’t automatically mean the underlying investment story has changed. For long-term investors, I think the question isn’t whether stocks will experience a decline. At some point, they will.
The question is whether that decline represents a fundamental change in the economy and corporate earnings, or simply a normal bout of market volatility. Right now, the answer isn’t clear. Interest rates and inflation deserve our attention, but corporate earnings remain a significant source of strength.
And that brings me back to Missouri weather. September tells us fall is coming, even when we’re sweating through 98-degree temperatures. The calendar can tell us what season we’re entering, but it doesn’t tell us exactly what the weather will be. The same is true for the stock market. September’s history tells us volatility may be coming. It doesn’t tell us exactly what stocks will do.
So rather than reacting to the calendar, or to a few uncomfortable days in the market, I think investors are better served by watching the fundamentals, staying disciplined and making sure their portfolios are built for more than just the current season. After all, in Missouri, we know better than most; Just because fall is on the calendar doesn’t mean summer is finished.
Have a blessed week!
Joe Shearrer
www.FerventWM.com
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Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.
Sources: https://www.lpl.com/research/blog/weak-september-seasonals-precede-strong-midterm-trends.html