Kathy
in Memos & Musings · 3 min read
The September Effect
The S&P 500 is known for its historical underperformance in September. It’s not just a matter of stocks often lagging; it’s also typical for the market to end the month with negative returns. What makes September particularly notable is that downward movements generally far exceed any positive momentum.
The technicals are intact (for now)
Recently, the S&P 500 has rallied back almost to its previous all-time highs following a V-shaped correction. The August scare, fueled by the Yen carry trade, seems to be a standard correction within a larger bullish trend. With volatility remaining low still, there currently appears to be no sign of widespread market panic as seen in the VIX index.
The recession narrative also seems to be losing steam. As cautious optimism makes a comeback on Wall Street, recent data indicates that recession fears are diminishing among some S&P 500 companies.
Despite market concerns about a potential economic slowdown, there hasn’t been an increase in S&P 500 companies mentioning “recession” in their second-quarter earnings calls. According to FactSet, only 28 companies used the term “recession” during calls from June 15 to August 15, well below the 5-year average of 83 and the 10-year average of 60. This quarter has the second-lowest count of such mentions since Q4 2021.
Beneath the surface, a significant rotation is occurring. This shift is widely viewed as favorable, moving away from the year-to-date leaders of the first half. Stocks that have lagged behind are now supporting the index. The rotation is transitioning from the Magnificent 7 stocks to a more diverse array of equities. Nonetheless, despite this shift, a substantial performance gap still persists in the last 1 year.
From a technical perspective, the recent rally is starting to look weak. Historically, such scenarios have been prime opportunities to take profits and rebalance risk. While rapid gains like these are typically unsustainable, they don’t necessarily indicate the rally will end. The more pronounced the deviations, the more likely it is that stocks will need to correct or consolidate before the rally can proceed.
Stay alert and be selective
With recession concerns easing, potential shifts in Fed policy, and positive sector trends, there may be strategic investment opportunities ahead. If there is a pullback or correction in September, it could be a chance to further accumulate in the stock markets.
It’s not advisable to adjust portfolios based solely on seasonal market fluctuations, as these aren’t always reliable indicators and don’t impact long-term fundamentals. Beyond solid fundamentals, we adjust our portfolios based on risk and reward, following our Moneyball investing approach, as implemented in our InvestingNote Portfolio.
We must stay vigilant, monitoring inflationary pressures and geopolitical risks that could increase market volatility. A well-thought-out investment strategy focused on selective stock picking could be particularly advantageous in the current environment, helping to manage risk while capitalizing on new opportunities.
As always, InvestingNote Portfolio subscribers will receive real-time trade alerts whenever we identify such opportunities.
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About Kathy
Co-Founder of The Joyful Investors and Manager of The Moneyball Portfolio. I graduated with a degree in Economics in National University of Singapore (NUS). My previous experience with traders at the Merrill Lynch enable me to realize many counter-intuitive truths about how the financial markets work and to uncover the challenges faced by many new investors. We believe that investing can be astoundingly simple and want to make financial education understandable for everyone.
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