Dangers are mounting, making September a doubtlessly harmful time for shares

Traders on the floor of the New York Stock Exchange (NYSE) in New York on Wednesday, August 11, 2021.

Michael Nagel | Bloomberg | Getty Images

After seven months of making gains, stocks face numerous potential risks that could cause September to live up to its reputation as the worst month of the year for the market.

According to the CFRA, the S&P 500 was positive only 45% of the time in September, dating back to World War II. The average decline of 0.56% per month is the worst of all months, with February being the only other month with an average negative performance.

Strategists say it isn’t clear that a correction or retreat is coming, but the risks have increased. These include changes in Fed policy, the spread of the Covid Delta variant and political risks.

Liz Ann Sonders, chief investment strategist at Charles Schwab, said it was too easy to assume that the market will follow history. “Are there innumerable risks that could at any given time be a risk factor that could lead to a pullback of more than 3% or 4%? Absolutely. Could it be in September?

The decline is even worse in September, when it falls in the first year of the president’s tenure. On average, the S&P 500 has fallen 0.73% over these years. CFRA also found that in years when the S&P hit new highs in both July and August, like this year, the S&P fell 0.74% on average and rose only 43% of the time.

The S&P 500 rose about 3% in August and ended the month with flat performance on the last day of the month. So far this year, the S&P 500 is up 20%.

Risks grow

The month of September has calendar risks built in, including the upcoming August employment report on Friday, which could determine how much the Fed will give in at its September 22nd meeting on plans to reduce its bond purchase program this year.

According to the Dow Jones, economists expect 750,000 new jobs in August. If the number is dramatically higher, market pros could see the Fed ramping up its plans to end its $ 120 billion monthly bond purchase program, possibly announcing it in September. If the salary data turns out as expected or weaker, the Fed could delay a few months.

Sonders said weaker data may not be negative for the market as it could suggest the Fed would slow down to reduce bond purchases. The liquidation of the bond program is seen as a precursor to a definitive rate hike by the Fed, although Fed Chairman Jerome Powell stressed last week that the two are unrelated.

Sonders said the Fed will rely on the incoming data in making its decision. That makes the course of Covid and its impact on the economy an important factor.

“The bottom line is, unfortunately, the market is still exposed to this … virus,” said Sonders.

Back to normal?

September has also been hailed as a month in which Americans should feel a sense of normalcy as the children return to school in the classrooms. The labor shortage is expected to subside in September as parents of school-age children return to work and extended unemployment benefits expire.

However, the spread of the Delta variant of Covid has meanwhile caused more uncertainty in the economy, as some companies are postponing reopening dates. Businesses from retail to restaurants are seeing a decline in consumer traffic in response to the spreading virus.

“Consumer confidence has already changed. It’s less about what the virus is doing now. We all assumed that things would be closer to normal in September, ”said Julian Emanuel, Head of Equity and Derivatives Strategy at BTIG.

Sonders said the focus on the Fed will be a priority in September, but Covid is also a potential factor. “I think the back-to-school component of this is more than just a potential needle mover,” said Sonders. “It’s about whether we can stay in general school operations without a much worse situation developing in some states where vaccination rates are lower. That is clearly a calendar-specific Covid risk.”

Emanuel said the market will be watching the Fed move ahead with its plan to curb bond purchases.

“This could be one of those when we get there on the 22nd and the job market,” he said.

Other risks in September could include inflation data. The consumer price index will be released on September 14, and if the data continues to get hot, Emanuel said it could drive government bond yields higher, which is negative for the market.

Emanuel said the market is also keeping an eye on any discussions about when the US will hit the debt ceiling and is also waiting to see the fate of the multi-trillion-dollar infrastructure bill, which is expected to be debated by Congress in September.

The US exit from Afghanistan is also hanging over the market as a risk factor. The last evacuation flights left Kabul on Monday. “The event has come and gone and the political fallout could be longer, especially if there are signs of greater instability in the region,” said Emanuel.

September is the worst month

Emanuel was expecting a sizeable sell-off, and September and October are often troubled times.

“That doesn’t mean the market will go down, but in our view there is a lot of complacency and belief that the market can’t go down unless the Fed hikes rates,” he said.

He said investors should guard against a decline and suggests using options.

“We’re not saying you should be scared,” he said. “What we are saying is to be careful. You have fantastic profits in your portfolio.”

Sonders said there have been major corrections in the market beneath the surface, although some investors see the market as resilient as major indices hit records. She said her main concern was speculative foam and those assets had been sold.

“They had rotation corrections and bear markets in areas like meme stocks, SPACs and cryptos,” she said.

Sonders said it is maintaining outperformance and that is health care. She said she pays more attention to factor-based investing than sector-based investing. She said she looks for factors that reflect quality on individual stocks and looks for things like stocks with strong free cash flow or earnings revisions.

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