On Labor Day, while many federal employees and others enjoyed a well-deserved break, we at Economic Prism chose to keep working—dedicated to bringing you insights and analysis without hesitation.
As we transition from August into September, it’s an opportune moment to reflect on recent trends and speculate on what lies ahead. A glance in the rearview mirror reveals that the stock market may have peaked; the DOW and the S&P 500 both concluded August with their worst monthly performance since May 2012.
So, is the market merely taking a breather before another upward surge? Or are we witnessing the initial signs of a significant downturn? Time will provide clarity on the situation.
In the interim, your financial advisor might suggest “buying the dip.” Technical traders may analyze their patterns of resistance and argue that the bullish trend remains intact. Meanwhile, perpetual bears view August’s decline as a precursor to a potential market crash of 50% or more. Ultimately, the truth remains elusive.
What is certain, however, is that September has a reputation for being a challenging month for investors. In addition, various factors present hurdles that the market will have to navigate. Here’s what to consider:
Unknown Unknowns
“Is the stock market poised for a significant downturn as summer transitions into fall?” inquires USA Today.
“Wall Street is confronting a myriad of challenges that could potentially trigger its first substantial market correction—a decline of 10% or more—since July 2011.
“Indeed, the stock market’s proverbial ‘Wall of Worry’ is towering, reminiscent of the Empire State Building.
“The risks are plentiful. Stocks are entering a historically weak season. Congress is on course for another contentious budgetary debate. The situation in Syria is escalating, increasing tensions. Additionally, the Federal Reserve is set to convene mid-month to deliberate on whether it’s time to reduce its supportive financial policies.”
These challenges represent the known unknowns. There are also the unpredictable events, or the “unknown unknowns,” that could disrupt plans—such as a catastrophic event akin to 9/11 or Fukushima.
Without a doubt, something significant is on the horizon. Just keep that in mind.
Secrets of the September Swoon
In the realm of stock trading, anything can occur. The ideal strategy is to purchase stocks when they are undervalued and sell when they are at their peak. While this principle seems straightforward, executing it is far more complex.
How can you determine if a stock is currently undervalued or overvalued?
You might base your decision on financial metrics, such as price-to-earnings ratios or price-to-book values. Alternatively, you could rely on technical indicators, such as moving averages or stochastic oscillators. Nevertheless, unpredictable events can easily derail your best-laid strategies.
However, if you’re willing to exercise patience and adopt a long-term perspective, you can likely identify excellent buying opportunities if you have the fortitude to act. One effective strategy is to leverage stock market seasonality to your benefit.
“Since 1971,” MSN Money reports, “September has consistently been the most unfavorable month for U.S. stocks. The average return on the S&P 500 Index for September from 1971 to 2012 is a decline of 0.52%. It’s notable that only three other months recorded any average loss during this period, with February posting the second-worst decline of just 0.1%.”
Clearly, maintaining some cash reserves is a wise decision at this juncture. The impending debt ceiling negotiations, escalating tensions in Syria, possible tapering by the Fed, and the historically bearish nature of September could trigger the anticipated market downturn. The key to capitalizing on the September swoon lies in being patient and ready to purchase after a market correction—though few will be prepared to take advantage.
In conclusion, while the landscape ahead appears uncertain, the historical data suggests that September can be a pivotal moment for investors. Staying vigilant and prepared will enable you to navigate the complexities of the market effectively.
Sincerely,
MN Gordon
for Economic Prism
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