On November 9, 2022

September yields to a sunnier October

By Kevin Theissen

For reasons that may never be fully understood, September has historically been the worst month for stocks, according to the average S&P 500 return for each month dating back to 1970.

In September, the Dow fell 8.8% and the S&P 500 Index was down approximately 10%. Historically, stocks turn around in October, and the remainder of the year is favorable for investors. So far, markets have followed this historical pattern as the Dow improved 14% and the S&P 500 increased 8%. According to Barron’s, this rebound showed the best monthly rise in the Dow since 1976.

Bear market rallies are not uncommon. Following the steep decline in September, it’s not unusual for overly negative sentiment and oversold conditions to lead to a bounce, as we saw in June and into August. The opposite would be a pullback in a bull market, when excessive speculation and bullish sentiment can lead to a short-term downdraft. October’s strong rally was not just technical as second quarter earnings came in ahead of expectations for most S&P companies.

A Wall Street Journal story suggested a strong likelihood of another sizable rate hike during November by the Federal Reserve, but also that the recent high-rate increases may not continue. They don’t expect near-term rate cuts but suggest the Fed might slow the pace and possibly stop hiking rates early next year, as they assess the impact of recent policy actions.

Opitimism for economy and housing market is usually better in October than September.

The housing market and the inverted yield on the 10-year/3-month T-bill (the 3-month rate is higher than the 10-year yield) suggest a recession is inevitable.  Investors are anticipating some shift going forward, and it contributed to last month’s rally. But any adjustment in policy could quickly change depending on inflation reporting.

The general economic fundamentals have yet to noticeably change. As low rates, low inflation, and record corporate profits helped drive stocks higher during the 2010s, today’s high inflation and high-rate environment has led to a bear market. Investors know that markets are forward looking and that bull markets follow bear markets, and eventually, major indexes reclaim their former highs. Since peaking in early January, the S&P 500’s decline through its most recent low of October 12 was 25% and through Oct. 31, down 18% for the year.

Kevin Theissen is the owner of HWC Financial in Ludlow.

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