Beware the Ides of September

After a pretty solid month global equities are finishing August with a whimper. The lack of reaction from both bond and equity markets to Jerome Powell’s speech at the Jackson Hole symposium underlines the belief that capital markets are prepared for the start of the tightening monetary cycle later in the year.

We highlighted August as a month that can often be a difficult one for equity investors, but it would appear that September is the one investors should be wary of. Apparently returning from holiday does not mean we arrive at our desks full of joy but rather depressed that winter is coming and the nights are shortening. In the US September is the only month to have negative returns including reinvested dividends. Perhaps also the fact that the following month is known to have more than its fair share of market crashes likewise puts equity investors in a defensive mood during September. A dollar invested in the DJII in only the month of September since 1885 would now be worth a quarter of what it was. A dollar invested in the DJII every month except September would be worth more than 2000 times.

There is plenty to make one cautious entering September. Technical analysts will point to the S&P 500 rise this year without a correction of more than 5%. Retail investors, having being highly cautious of equities over the past 10 years since the crash have been pilling in. Credit markets, which tend to lead equity markets have been underperforming. Margin debt appears to be peaking, often a  signal that a correction is due. The 200 day correlation between value and growth has reached the extremes we saw before the sharp fall in tech stocks around 2000. On a brighter note as much as the valuation of US large cap equities is a constant concern, it is noteworthy that the valuation of the Russell 2000 index of Midcap stocks, at 16x is far closer to the historic average.

This week, as we highlighted in the week ahead, we will get some useful economic data. The flash PMI’s for the US and UK towards the end of August indicated a greater slow down than had been anticipated. Europe where infection rates of the virus and not accelerated as quickly remained more encouraging. Consumers have been hit by higher prices and a lack of supply, denting confidence.