September Jitters?
Two trading days into September and the S&P 500 is down about -2%. Investors often get a bit nervous after Labor Day for a couple of reasons:
- Politicians “go back to work” (if we can call the lack of compromise and governance that Washington is famous for) and many of us believe that our elected officials tend to do more harm than good to both our economy and the stock market when they start legislating; and
- Historically, September has a reputation as the “worst” month of the year for markets (see the blue bars below).
We had negative single digit losses (-4% to -9%) for the S&P 500 in the past 4 Septembers from 2020 – 2023. Prior to that we did have 3 small positive returns for the S&P 500 (0.4% to 1.9%) from 2017 – 2019. Time will tell whether the market can have an “up” September this year…
Given September’s track record, why have any optimism?
- The Federal Reserve’s “NowCast” of economic growth for 3Q 2024 is currently 2.0% GDP 3Q with just 19 workdays left in the quarter (https://www.atlantafed.org/cqer/research/gdpnow).
- The Federal Reserve has also signaled that they plan to start lowering interest rates as soon as their next meeting 2 weeks from now. When the economic forecast is for a “soft landing” like the current consensus is expecting, and the Fed begins a multi-year easing cycle of interest rates, stock market performance is typically positive.
- And unlike the past 2 Septembers, FactSet report the current consensus earnings forecast for 3Q (+5.2%) and 4Q (+15.5%) is for rising not declining Year-over-Year profits. Better still, the consensus estimate is for rising profits for 2025 and beyond (see below).
If that is an optimistic case, then what could change the near-term outlook? The risk remains the same since February of 2023 – geopolitical risks. We have two ongoing historical grievances or ‘forever wars’ without clear resolutions:
- Russia vs. Ukraine conflict and
- Israel vs. Iran and its surrogates of Hamas in Gaza, Hezbollah in Lebanon, Fatemiyoun / Zaynabiyoun in Syria, and Houthis in Yemen.
Although the carnage from these 2 conflicts has been shocking, thus far, both wars have been contained to a discreet geographical area rather than blossoming into a larger regional (Middle East or European) battlefield. Governments across the globe are searching for a peaceful resolution for both of these conflicts.
Finally, we are fast approaching our Presidential election on November 5th. And although that means that approximately 49% of our fellow Americans will be disappointed with the outcome, it is too early to assume a bad market outcome from the election.
Historically, the market does well regardless of which party is in the White House -- every President except poor George W. Bush was blessed with a rising market during their term(s) in office (see the rising blue line in the chart below). Bush 2.0 had the misfortune of 2 “meltdowns” during his terms – the “Tech Bubble” and the “Great Financial Crisis”. He will forever be remembered as the President during the “Lost Decade” for the S&P 500.
When we are asked “who was better for the market: Trump or Biden? As of the end of August, the S&P 500 has performed EQUALLY well under both Trump and Biden during their first 44 months as President – there was no difference.
So as Americans, let your politics guide your vote. But as investors, let’s put our politics on a back burner and take a deep breath during the next 60 days as we countdown to election Tuesday. Our collective political emotions will probably be elevated, and markets do not like uncertainty. But whether September & October are “up” or “down” markets, we historically have post-election rallies (see light blue bars between red arrows below).
So sit back, enjoy your beverage of choice with some popcorn and watch the political show we call “election 2024”.