The S&P 500 is down 2.7% so far this week and down almost 4%. The more volatile Nasdaq index has fallen 3.5% this week through today and lost almost 6% month-to-date. As of now, the S&P 500 undercut its August lows, hitting its worst levels in nearly three months. The Nasdaq hit its worst close since early June, and the Dow marked its lowest finish in over two months. Just “Seasonal weakness”? The “September Effect”? I have written before about both and alluded to them in my
August Market Monthly podcast. So, while we know this period of the year, especially the month of September, has historically been the weakest time in the U.S. stock market, is that all there is to the market’s recent sell-off? I don’t think so. Yes, September has been the worst month on average for the Dow Jones Index since 1896 (losing on average 1.08%). But, this September has caused the market more FUD (fear, uncertainty and doubt) than most past September’s. #1 is the fear of “higher-for-longer” interest rates. The “good news is bad news” syndrome in the market since early 2022 is still intact. Consistently good news on the economic front and the shadow of persistent high inflation has investors concerned the Fed will raise interest rates more. The market’s expectations of a rate hike in November jumped from a 40% probability to 69% today. This is largely a function of Fed Chairman Powell’s comments yesterday. Even though the Fed has raised rates to the highest level in 22 years, Powell said higher than expected GDP growth (good econ news) and inflation pressure, will likely cause the Fed to raise rates at least one or more times this and took away the market’s hope for interest rate cuts any time soon. Rates are driving market. Bonds yields are soaring as stock prices are falling. Again, we saw that in 2022.
In addition to the impact of interest rates (think battle with inflation) on the stock market, worries over corporate earnings and revenue weakening, consumer spending slowing (due in part to resumption of student loan interest payments in October), and America’s mounting enormous debt. As of Monday, U.S. Government dept climbed over $33 trillion. So, here we go again addressing the “Debt Crisis” and another threat of a U.S. government shutdown on October 1 is quickly approaching. Then there’s fears of corporate loan defaults. Uncertainty over borrower’s (especially corporations) ability to make good on bond obligations in the face of spiking interest rates. Additionally, oil is climbing towards $100/barrel (a friend in LA told me he paid over $7 a gallon for gas!). Just one more thing (among others). After a big advance in the stock market this year (especially the Nasdaq), profit taking is evident now. Today for example, of the top 40 most-up stock this year, 39 of them were down.
Okay, we survived August (2nd worst month for stock market historically) and summer period is behind us. We are nearly out of September. We should expect a rate hike in November. As I wrote in early July, the first half of 2023 was one of the best ever for the stock market, so some selling recently makes sense. What might be ahead in Q4? Being a pre-election year bodes well for the U.S. stock market. History shows that the stock market rises about 20% on average in pre-election years. Also, old investors (like me) have bad memories about the stock market in October. However, October has actually been a good month for stock investors over the long run. It has fondly been referred to the “Bear Killer” as it has marked the end of many falling market periods and been when market run-ups have often started. So, we may have the “October Effect” to thank for a year-end rally in the stock market. Don’t be fearful. Here’s what Ben Graham has to say about that:
“Price is a creature of the market’s mood. In booms, it is set by the greediest buyer; in busts by the most fearful seller” – Benjamin Graham
