Market Update for September:
Can Things Really Only Get Better?
Stock and currency markets performance
September and the third quarter have come to an end. The results continue to look grim for global markets:
As to be expected with market results like these, the perception of the US Dollar as a safe haven during uncertain times meant continued, rapid strengthening against other benchmark currencies.
Have the markets bottomed out?
September has historically been the worst performing month, with the fourth quarter consistently being the best performer.
So does this mean we can all relax in the knowledge that things can only get better and that history will repeat itself?
Sadly, I don’t think it will be that simple. Sure, the long-term outlook is rosy for a 35-year-old who is still working full time but also comes into a lump sum of cash to invest – they should see great returns over the next 10 years with prices as low as they are. The picture isn’t as rosy for those nearing the end of their investment horizon: fear that the 20%++ losses in their portfolio will take years rather than months to recover, plus the concerns that the worst is yet to come and their investments may have yet to bottom out.
This scenario once again illustrates the importance of having the right amount of equity exposure.
Volatility is inevitable. Given such a positive July, this quarter’s results actually weren’t that bad, but the anticipated recovery that we were hoping for just did not happen.
Are governments helping or hurting matters?
I have voiced concerns in previous blogs about the US Federal Reserve’s continuing aggressive talk about willingness to raise interest rates until this inflation is beaten, whatever the consequences. The potential stress on the housing market with so many homeowners having borrowed at too low a cost and paid too much for real estate is a drum I have been banging all year.
At a loss of 13.7%, Real Estate was the worst performing sector in the S&P in September. So perhaps the market shares my fears. Although all sectors were down, Healthcare was the best performer, losing just 2.7%.
The UK mini budget, which offered tax cuts and would require borrowing sent the British Pound into a downward spiral, actually reaching its lowest level of all time against the US Dollar. Bank of England intervention and the typical market over reaction however meant that it is now around 5% higher than its low.
Recovery around the corner or more like down the block?
The inflation figures for September are going to be crucial in answering the question whether we start the recovery in 2022 or we have to wait until 2023. August figures were not what was hoped and despite the interest rate raise being in line with expectations, the constant reminders from the Fed and the language used just create these overactive sell-offs.
The word recession is bandied about a lot. Technically, given that we have had two quarters of negative GDP, we are already in one, though I really don’t know how this really makes a difference if we first get a positive inflation report later this month and then the Santa rally we are hoping for.
The overreactions of markets also work both ways. We have of course come a long way since the 1930s, when we saw quarterly returns upwards of 85%. We only need to go back to 2020 to see some significant swings, when the markets fell 19.6% in the first quarter then rebounded in June to positive territory at 20.5%.
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Bear markets mean discounts
Value does exist in the long term, but finding that value is not easy. For example, shares of Nike this year have fallen by 50%. Is Nike now really only half the business it was on New Year’s Day? Not that I can see, yet its price seems to paint that picture.
We’ve all heard the saying “what goes up must come down”, but when good businesses are trading at prices like they are today, maybe the better mantra is “what goes down must go up!”