September has historically been the worst month for stocks. Since 1896, the Dow Jones Industrial Average has lost 1.1% on average in September. No one really knows why, but some blame it on the mutual funds that close out their fiscal year this month. Others blame it on the Fed’s interest rate policies prior to year-end. Some even blame politics.
In fact, the stock market has a knack for predicting who will win Presidential elections. When stocks are higher three months prior to the election, the incumbent party has won 86% of the time. When stocks are lower, the incumbent party has lost 88% of the time. In other words, the best poll is the market for predicting who will be our next President.
The S&P 500 is up approximately 2% from its 2015 closing highs of 2130. Stocks have been basically flat since mid-July and have trended slightly lower over the past few weeks. While volume continues to be weak, market breadth is reasonable so there are no immediate signals of a major market decline. There are some other concerns beyond the lofty valuation in the current market. First, investor optimism based on several sentiment surveys and indicators is excessive, which tends to be a negative leading indicator. Second, the transportation industry is also showing weakness and is generally a very reliable early leading indicator of future economic weakness.
So what does all this mean? For your investments, it means 1. Stay agile 2. Diversify across all asset classes and 3. Don’t bet the farm on any one thing. The market could go higher, but it could just as easily drop. The Fed and the US Elections will drive the narrative going forward. But any unexpected news between now and year-end could throw a monkey wrench in 2016. If you’d like to have a more detailed discussion, please call or email us.