Over the past few months, we have been pointing out that stock valuations are stretched and need a period of consolidation. September has historically been a tough month for stock market performance, and we suggested last month that this seasonally weak period could be a place to see a pullback.
After the market decline in March 2020, September of that year was the first down month, and we saw something similar this year. After moving lower in January, the S&P 500 had rallied for seven straight months and gained over 20%. We faced numerous headwinds going into September, including a slowing economy in China, a potential government shutdown, rising interest rates, rising oil prices, supply chain issues, and computer chip shortages.
At the end of September, the S&P 500 had declined by 4.8%, its worst month since March of 2020, but is still 14.7% higher for the year. The tech-heavy NASDAQ led the way lower with a loss of 5.3%. Oil prices rallied 10% in September, but gold, despite a 2% rally on the last day of trading, ended the month with a loss of 3.3%.
The stock market will typically rally during the week before a 3-day weekend, and we began September with the S&P 500 moving .6% higher for the three days going into the Labor Day weekend. A government report that only 235,000 new jobs were created in August, only 32% of what was expected, generated little market reaction. The holiday-shortened first full week of the month began with Goldman Sachs downgrading their economic outlook. Seasonality generated selling that sent the S&P 500 lower each of the four days, and the widely followed index ended the week with a loss of 1.7%.
The second full week was a back-and-forth affair with the Dow closing with a change of more than 200 points, three of the five days. CPI was below expectations, and retail sales were better than expected, but rising interest rates sent the tech-heavy NASDAQ to a 6-day losing streak for the first time in 2 years. At the end of the week, the S&P 500 had lost another .6%. The period between September 15th and October 15th has traditionally been the most difficult for stocks, and we began the 3rd full week with the biggest down day in four months. A strong two-day “buy the dip” rally at the end of the week helped the S&P 500 finish the week with a gain of .5%. The selling pressure continued during the last few days of the month, sending the S&P 500 lower.
Seasonality is a guide, not an absolute, but the September/October period has traditionally had a downward bias. October has a bad reputation as it is home to several major market “crashes,” but the month has an average gain of .4% and has closed higher nearly 60% of the time. Weakness tends to present itself in the early part of the month and then firm as we move towards more seasonally favorable November through January.
September of 2021 was very similar to September of 2020, and October of 2020 was another down month, with the low not being hit until the last trading day of the month. We will continue to patiently wait for opportunities to deploy cash we have accumulated, but we continue to be buyers of weakness, not sellers.
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