Can Stocks Rebound After a Tough September?

Wall Street - Scott Eels, Bloomberg
Credit: Scott Eells/Bloomberg

We are entering the last week of September and, so far, the month is going pretty much according to type. Maybe it is because the end of summer induces a sense of melancholy and even impending doom, or maybe it is just because in a typical year, the first three quarters see good gains and an adjustment is almost inevitable, but whatever the reason, September is historically the worst month of the year for the stock market. On average since 1928, only three months show negative returns for the S&P 500 and September, at -1.1%, has by far the worst record according to this report from Yardeni Research.

Presumably, therefore, there is some degree of seasonality to this bad September, but a month-to-date (MTD) decline of 4.16% by Friday’s close and with futures indicating another lower opening this morning as I write, things this month are much worse than the average. That is because this drop isn’t about some tenuous link between the date and the market but is because there are some very real threats to economic stability right now.

Last week, the Fed made it clear that they aren’t afraid of continuing to squeeze growth by raising interest rates even higher than they are. That is admirably steadfast and consistent, I suppose, but there are some indications that the impacts of the rate hikes so far are just being felt, so maybe now is the time for some flexibility rather than for making a stand.

House prices, for example, which because of supply constraints have jumped over the last year and a half despite rising interest rates, have begun to wobble. They still rose in Q3 of 2023 compared to the same quarter last year, but as the Federal Housing Finance Agency Quarterly Report released at the end of last month shows, it was by a lot less than in the previous two quarters, and by the lowest amount on that basis for ten years.

House price appreciation

More worryingly in some ways, according to Goldman Sachs, credit card losses at banks and other financial institutions are running at their highest level since the 2008/9 financial crisis. More than a month ago, on August 15th to be exact, I wrote in these pages that the massive expansion of credit card debt in the U.S. was a “ticking time bomb” for the American economy, and it seems as if the timer may be running out. When people feel confident about their situation, they borrow freely, whether in the form of a big mortgage or increased credit card debt, but there are clear indications that that confidence is waning. Consumer spending is the main driver of growth in America, and if people are being forced by circumstances to pull back, tough times are ahead.

These things are data-driven reasons to worry, but there are also a couple of fear-focused things holding the market back. There is the threat of a government shutdown that, given the proven record of destructive behavior by the group of extreme right wingers holding out and the inability of Speaker Kevin McCarthy so far to handle them, looks actually quite likely to happen this time around. Then there is the UAW strike that, no matter how much one may understand the union’s grievances, is an indicator of an inflationary cycle that is getting out of hand. And that doesn't even cover the Russian war still raging in Ukraine, unpredictability in China, and high oil prices.

The fact is that typically big market drops and the recessions that underly them are not the product of one thing. They are prompted by a confluence of negative influences that induce a mood so fearful that the realization of just one of them prompts a big cutback by businesses and households alike. So far, we haven’t had that, but the market losses in September suggest that traders and investors believe it is coming.

Investors should resist the temptation to shrug off this market move as a product of the month of September, a seasonal drop that was almost inevitable but means very little. There are multiple threats to economic stability right now. The realization of any one of them would mean a bad last quarter for stocks, and maybe even a bearish move beyond that.

If you haven’t taken some steps to protect against that yet by dialing down the risk in your portfolio, now would be a good time to do so. Long-term investors should never try to time the market completely, but taking some long-term profits off the table, or maybe adding some insurance by way of something that will go up if the overall market drops, like an inverse index fund or a VIX tracker, would be a smart thing to do. This could all blow over, but storm clouds are gathering, and seeking some shelter is the smart thing to do.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

Read Martin's Bio