Strange September Market Sets Up a Pivotal October
September lived up to its poor reputation, but October has a history of starting year-end runs, especially in midterm years.
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The month of September has lived up to its reputation for poor seasonality. It is historically the worst-performing month of the year, and this year has been particularly unusual because of the great disparity in the action.
The Nasdaq 100 enjoyed a gain of around 3%, and the S&P 500 is close to even with a small loss, but the Russell 2000 is down a bit more than 5% and the DJIA lost 3%.
The Damage Under the Surface
Those aren’t terrible numbers, but they hide a great deal of damage under the surface. As I discussed Tuesday, the median stock trades 16% below its 52-week high. A 20% pullback is generally considered a technical bear market, which means a large share of stocks are already wallowing in one.
This disparity creates a peculiar mix of sentiment. The folks who focus on the indexes tend to think the market is fine. Higher interest rates might be a problem, but AI is a powerful economic tailwind, so overall things aren’t that bad.
This lingering optimism means we haven’t had the kind of capitulation that usually marks a bottom in the beaten-down areas. Many stocks are now deeply oversold, and there are some concerns that the AI group may not progress much from here. If the AI and chip leaders start to lose momentum, nothing will be left to hold up the rest of the market.
Inflation Data on Deck
The August report on the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, is due at 8:30 a.m. ET. Expectations are for core PCE to rise 0.3% for the month and 3.4% from a year ago, up from 3.3% in July. An in-line reading keeps the pressure on bonds and keeps an October rate hike in play, even after the odds dropped to around 50% Tuesday on dovish comments from New York Fed President John Williams.
A hot PCE number would push those odds back up quickly. A cooler reading is the one thing on the calendar that could give bonds some relief, since lower oil and a dovish Fed comment weren’t enough to do it yesterday.
October and the Quarter-End Shuffle
We are now entering October, which also has issues with poor seasonality. Several major crashes have occurred in October, most notably in 1929 and 1987. However, it is also the month in which the market tends to bottom and start a year-end run. In midterm election years, October has been the best month of the year, higher 73.7% of the time since 1950 with an average gain of 3%.
Conditions look particularly good for some year-end strength this time, as the midterm election is often a positive catalyst and many stocks are now deeply oversold.
The big problem remains the multi-year high in interest rates. The iShares 20+ Year Treasury Bond ETF (TLT) and the iShares 7-10 Year Treasury Bond ETF (IEF) hit multi-year lows Tuesday, and there is a little bounce action early Wednesday.
Since this is the last day of the third quarter, many major funds will rebalance their allocations between stocks and bonds. Because bonds dropped more than stocks, the funds will need to sell stocks and add bonds to get back to their preferred balances.
Goldman Sachs estimates pension funds alone will buy about $33 billion in bonds and sell a similar amount of equities. That may temporarily relieve some pressure on bonds and add a little pressure to stocks, so we may see some unusual movement this afternoon.
Game Plan
I feel like I’m being a bit repetitive with my game plan, but the point of a game plan is to stick with it until there is a good reason to change it. I see no reason to change what I’m doing right now, which is maintaining elevated cash levels and waiting for better technical development in my favorite stocks.
I have been making a few incremental buys and have taken some hits in names I’m holding, but I’m optimistic that the opportunity to buy more aggressively will arrive soon. I don’t want to deploy precious capital too quickly, but I do want to take advantage of dislocations popping up on my screens.
It is an unusual mix of action out there, but the good news is that it is just another cycle, and the stock market’s great certainty is that another cycle awaits us.
At the time of publication, Rev Shark had no positions in any securities mentioned.
