There has been a bit of a debate about what month is really the spookiest with crashes often happening in October but the records actually show September is a bigger concern for those who try to make money on the market.
The Financial Review’s Justin Bailey recently looked at the scary months and it’s appropriate to be cautious given the fact that the S&P/ASX 200 is up around 40 per cent since we hit rock bottom on the stock market in early March. The Yank’s S&P 500 is up close to 45 per cent and that’s why even the bulls are tipping a pullback.
It’s interesting that both the bulls and the bears are anticipating a sell-off of shares but for very different reasons. The bears think the US economic recovery will be late, weak and will be more sideways than up. Some think the recovery will be W-shaped linking it to a double dip recession — down, up and then down again with an eventual rise.
The bulls want a pullback in share prices to simply buy more shares at lower prices. That’s why I suspect that most pullbacks won’t go very deep and last for long because there are people with cash on the sidelines that have missed the post-March rally and are kicking themselves for being too cautious.
Reports looking good
What will happen? Excuse me for being a Calpurnian, but “beware the big bad number!” Right now, more and more doubters are starting to believe that the worst is behind us. Both the US and Australian company reporting seasons have given the company profit recovery outlook the thumbs up with both current and future bottom lines coming in better than expected.
But the future of companies’ healthy balance sheets will rest on the US and the global economic recovery. One false move and the share market cops it!
Right now in America, one important piece of the economic puzzle has been found and put into place — an improving housing sector. For four months in a row, existing homes sales have headed up. Some critics say but this is people buying foreclosure properties and so big deal. My reply is, six months ago, you could hardly give away these places — this is a go forward indicator for the US economy.
Jobless rate watch
But the big watch has to be the jobless rate. The labour market statistics have to scream to the American people that their jobs are safe. This will create the turning point for the all-important US consumer, the economy and the stock market.
The bears say the US consumer is missing in action and will take a long time to come back to the shopping malls. For American GDP, the US consumer accounts for 70 per cent of its growth and that’s why job security is critical.
Right now, the US saving rate has risen but this always happens in recessions — it’s people giving up their profligate, hedonistic ways to become responsible.
Fortunately for the economy, that does not last. Eventually, when Americans think their job is safe they head back to where they belong — the malls — and they resume their ‘shop til you drop’ ways.
The Dow in September
So, what about the threat of September and October?
Research from the ANZ economics team found since 1921 the Dow Jones has headed south on average by 1.3 per cent in September. Making it the worst month for the stock market.
Recall the 11 September crash happened in this month and so did the collapse of Lehman Brothers last year. And as we often play follow the leader with Wall Street. What’s bad for our New York buddies is not real flash for us.
For Australia, October is our worst month with an average share price loss of 1.2 per cent. There’s that follow the leader relationship again.
Apart from the occasional crash that has happened over these months, there are other reasons why shares give in to gravity around this time of the year.
One possible cause could be that American fund managers come back from summer holidays and take a long hard look at their portfolios. It’s an autumn clean out if you like.
Shane Oliver from AMP says US mutual funds see the end of their financial year and could sell stocks to realise capital losses for tax purposes. I reckon that makes a bit of sense and it explains why November and December can be stronger months as these people re-buy many of these stocks.
There’s also a window to ride up a good reporting season and sell off ahead of the next one ahead of buying back before the next company reports come out.
It’s guesswork but it’s worth noting my warning: “Beware September and October!” That said, I’m not too scared this year.
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