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With only three trading days having passed thus far in September, the Standard & Poor’s 500 has already declined 3.59% confirming what investors have known for years, that September has historically been a challenging month for stocks. If this September is like past ones and, given the dismal Jobs Report released by the Labor Department this past Friday, there is little indication that this September will buck this historically downward trend.
In addition to the recent decline in payrolls noted above as well as the corresponding rising Unemployment Rate from 5.7% to 6.1%, there are many other issues dampening the bullish outlook for stocks. These issues, unknowns and concerns are like a “perfect storm” and include those of geopolitical, political and economic natures.
The geopolitical concerns weighing on the stock market include the ongoing potential threat of terrorism in the United States; the war on terrorism in Afghanistan and Iraq; the ever present threat of military conflagration between Israel and Iran in the Middle East; and Russia’s encroachment into the country of Georgia and the repercussions for NATO and therefore the United States.
The political concern impacting the market is obvious, the upcoming Presidential Election and the potential for changes in the structure of how both individuals and corporations are taxed. Individuals may see changes in both earned income in the form of a higher marginal tax bracket and unearned income in the form of higher rates on realized capital gains and dividend income. Corporations may also see changes in how they are taxed with an appropriate emphasis on deductions or credits for those companies that are domiciled and hire in the United States.
During this election season it is appropriate that trumping all of the concerns noted above is a quote that former President Bill Clinton stated during his initial run for the presidency in 1992, “it’s the economy stupid.” It is painfully apparent that despite some progress and as a result of proactive action from both the U.S. Treasury Department and the Federal Reserve, the financial services industry as well as the housing sector remains in a deep funk. Obtaining credit, the lifeblood of the American economy is difficult, at best as lending institutions struggle to rebuild capital. The result has been a precipitous drop in demand for housing and therefore housing prices, a cessation of leasing by some automobile manufacturers and subsequent layoffs.
Thus far, declining oil prices have done little to help lift stock prices as many wonder whether oil moving from $145/bbl to $105/bbl is more a symptom of a sluggish global economy and therefore a decline in demand than anything else. If this is true, corporate earnings will remain weak.
After reading the above, one might wonder whether the glass is more than just half-empty. Despite our short-term concerns, investors must remember that stocks do “climb a wall of worry” and that they historically make a bottom during the months of September and October. Finally, some of the recent selling may be “forced liquidation” coming from hedge funds and those entities that must raise cash in order to meet redemptions. We are also experiencing a transferring of stock from weak hands to those that are willing to assume short-term risk for longer-term benefits.
First and foremost we recommend that investors allocate their assets between stocks, bonds and cash according to their needs and tolerance to risk. Secondly, as noted within past columns we urge investors to focus on the next two to five years rather than the next two to five months. If one is able to accomplish these tasks, we believe they will be well rewarded.