“Must be the season of the witch…”
This line comes from a brooding song written and sung by Donovan in 1966. It’s also an apt description of the historical September-October performance in the stock market. According to Birinyi Associates, volatility generally returns after traders come back to work following the Labor Day holiday. On average, September and October have been poor months for equities. Some of the most dramatic crashes have occurred during this timeframe, and the current major stock indices are at or near all-time tops. We’ve had over 50 intra-day highs on the S & P 500 already this year. Are we ripe for the long-awaited correction? Should we be breaking out the camouflage and safety helmets?
It’s quite possible that some profits will be taken. After all, 2021 has been a more than solid year for equities. There’s an old saying on Wall Street – “Stocks go up a staircase, but they go down an elevator.” We certainly could experience a short freefall. If we do, though, why wouldn’t the ship be quickly steered back on course? What macro conditions have really changed?
While there are many things we can worry about – resurgence of COVID-19, geopolitical problems, the horrific damage of Hurricane Ida, increased possibility of terrorism post Afghanistan withdrawal – the factors that have underpinned the stock market are still here. Despite the almost daily sturm und drang of news flow, interest rates have remained stubbornly low. The benchmark 10 year Treasury still hovers around 1.30%. It’s a fair assumption that most of us aren’t too thrilled about investing funds for ten years that guarantee loss versus inflation. The Federal Reserve has continued its dovish stance even with talk of tapering stimulus. Perhaps more important than the low interest rate environment is the solid staying power of corporate earnings. This cycle of quarterly reporting exceeded already lofty expectations. Many companies gave positive future guidance and several raised dividends. Unless we have further COVID-related shutdowns, the economy should continue its upward trajectory.
Let’s face it… we’ve had a streak of seven positive months in the stock market. It’s logical to assume that we may hit a rough patch. However, unless the trough is triggered by something that significantly changes the macroeconomic landscape, my feeling is that we’ll be ok. It might actually be a fine time to put some cash on the sidelines to work.
Of course, RC, Ruth, and I will be monitoring conditions closely during the season of the witch. Please feel free to reach out with any questions or comments. We look forward to talking with you soon. Thanks as always for your continued faith and trust. Take care and stay well.
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
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