Recently, the markets were closed in observance of Labor Day, but at Economic Prism, we continued our reflections. There’s always much to consider, especially in today’s unpredictable stock market.
One significant focal point is the stock market’s astonishing performance. Day by day and month by month, this broad indicator of economic sentiment keeps climbing. In fact, August marked the S&P 500’s best month since February.
“The S&P 500 rose 3.8 percent last month,” reported MarketWatch, “making it the benchmark’s best August performance since 2000. The index also registered its largest monthly percentage gain since February when it increased by 4.3 percent.”
This upward trend is indeed remarkable. Since hitting a low of 666 on March 6, 2009, the S&P 500 has surged over 300 percent. By simply buying and holding an index of the largest 500 companies, investors have effectively tripled their investments.
But how much longer can this upward trajectory persist? The future is uncertain. While the last five years have been incredibly lucrative for stock market investors, it’s unlikely that the next five will yield similar returns. Eventually, stock values must realign with long-term averages.
September Swoon?
In the short term, anything is possible. The upcoming month may present a tumultuous ride, as September has a notorious reputation for being unfavorable for stocks.
“If a stock market selloff is imminent, September seems like a plausible time for it to commence,” observes veteran market analyst Mark Hulbert.
“Historically, September has been the worst month for the Dow Jones Industrial Average, averaging a loss of 0.8 percent. In contrast, the remaining eleven months typically see an average gain of 0.8 percent.”
Yet, the fear of a September decline may not be justified. According to Hulbert’s analysis, significant market drops in September have primarily occurred when the market was already in decline.
“One reason not to alter your portfolio simply because Labor Day is around the corner is that September’s reputation is largely based on years when the market was already struggling — which isn’t the case this year. Over the past century, when the Dow experienced a year-to-date loss by the end of August, it tended to lose an average of 2.7 percent in September, declining more than two-thirds of the time.”
“Conversely, when the Dow enjoyed a year-to-date gain by the end of August, it secured an average increase of 0.3 percent in September and rose more often than it fell. This year, the Dow is up 3 percent as of Thursday. Last year, it experienced a year-to-date gain heading into August, resulting in a 2.2 percent climb in September.”
Musical Chairs Investing
Consequently, there’s no guaranteed method for predicting stock price movements. Even during historically challenging months, exceptions exist. Additionally, stock valuations can diverge from historical norms for extended periods.
Right now, the stock market resembles a satellite that has strayed from its orbit. While it may continue its erratic dance unchecked for some time, ultimately, it will crash back to Earth.
Most of the market has become speculative. While there may be hidden gems with undervalued shares, the general consensus is that stock prices are high.
The traditional approach of “buy low, sell high” has evolved into a current trend of “buy high, sell higher.” This game of musical chairs appears to be a precarious strategy for accumulating wealth. So, what should investors do?
Back in July 2007, as financial markets reached all-time highs, former Citigroup CEO Chuck Prince remarked, “When the music stops, in terms of liquidity, things will become complicated. But as long as the music plays, you have to get up and dance. We’re still dancing.”
We now know how that turned out when the music ceased.
For now, the music continues to play. You can dance if you choose, but it may be wiser to sit this tune out.
Sincerely,
MN Gordon
for Economic Prism
