Glad that August is over? Not so fast
Even in the best of times, Wall Street has come to fear September and October.
Now, with financial markets worldwide on edge after a summer of turmoil, investors have good reason to be even more apprehensive than usual about what the next two months will bring.
Historically, September has been the U.S. stock market’s worst month of the year in terms of the average performance of major indexes.
“September has been a perennial problem,” said Sam Stovall, chief investment strategist at Standard & Poor’s in New York.
The S&P; 500 index of big-name stocks has fallen in half of all Septembers since 1990, he said.
October, meanwhile, has hosted some of the worst market crashes -- in 1929 and 1987, most notably. More recently, October 2002 saw stocks slide in the final burst of selling of the 2000-02 bear market.
As Wall Street gets back to work today, investors will have to contend with more than the usual seasonal uncertainties about the direction of stock prices.
The central concern is that the housing sector’s woes have spread far beyond that industry and could pull down the broader economy, taking corporate earnings with it.
Bill Fleckenstein, a Seattle-based money manager who for a long time has predicted a day of reckoning stemming from the debt buildup in the domestic economy, contends that we’re on the cusp of “the most brutal consumer-led recession in 50 years.”
His is a minority view. But the summer’s global credit crunch was such a shock that it caused many market pros to rethink their worst-case scenarios.
Investors began to dump mortgage-backed bonds in the spring as home loan defaults soared. In August, the fear grew that other types of borrowers that loaded up on debt in the easy-money era of recent years also could have trouble repaying what they owe -- for example, companies that issued large amounts of high-risk junk bonds.
As investors and banks worldwide pulled back from extending credit in August, a financial panic ensued. Stock markets suffered collateral damage. U.S. share indexes fell the most in more than four years before rebounding somewhat.
Stock investors’ moods have improved in the last two weeks, bolstered in part by the Federal Reserve’s efforts to pump money into the banking system and by the growing belief that the Fed will begin trimming its key short-term interest rate, now 5.25%.
Maria Fiorini Ramirez, who heads an economic consulting firm in New York, expects the central bank to cut its benchmark rate by a quarter of a percentage point at each of its next three meetings, beginning with the Sept. 18 gathering.
With debt markets still unsettled, particularly the mortgage market, Fed policymakers “know this problem of access to credit is going to dampen the economy down the road,” Ramirez said.
Some analysts say Wall Street is counting so heavily on rate cuts that the Fed would be courting more serious market trouble if it took no action.
“At this point, it would be very difficult and risky not to cut” on Sept. 18, said Jan Hatzius, an economist at Goldman Sachs & Co., “even if the markets calm down somewhat in the meantime.”
With their rebound since mid-August, major U.S. stock indexes are down only modestly from their record highs reached earlier in the summer.
The S&P; 500 is off 5% from its peak on July 19; the Dow Jones industrial average, which closed last week at 13,357.74, is down 4.6% from its all-time high reached the same day. It’s up 7.2% year to date.
Even at their mid-August lows, most equity indexes were down no more than 10% to 15% from their highs -- a garden-variety “correction,” or short-term pullback in a bull market.
The question now is whether the bull can get back on its feet and run again or whether another stumble is likely in the short run.
Some market veterans say investors who held on to stocks in August ought to stay the course.
“People know that after a financial crisis, the stock market tends to recover,” said Brian Gendreau, a strategist at ING Investment Management in New York. For example, shares quickly rebounded after Orange County’s unexpected bankruptcy in 1994 and the failure of giant hedge fund Long-Term Capital Management in 1998.
“We think if we moved out of equities we’d miss the bounce,” Gendreau said.
Although the historical trend of share prices in September isn’t encouraging, it’s possible that the selling that might have hit stocks this month occurred in August instead.
There’s no concrete explanation for why September has often been a lousy month for stocks. One theory is that investors return from vacation, don’t like the looks of their portfolios and start to make them over.
One atypical threat to the market this month is that some of the big corporate buyouts that were announced this year may not proceed because of funding problems related to the credit crunch.
An estimated $300 billion in buyout financing must be raised in the next few months. If investors and lenders balk and deals fall apart, that could be a catalyst for another market sell-off.
Jim Swanson, chief investment strategist at mutual fund firm MFS Investment Management in Boston, said he believed the credit crisis was blowing over. He noted that yields on junk bonds have stabilized in recent weeks after surging in June and July. That could be a good sign for buyout firms as they prepare to borrow, he said.
For many market optimists, the main reason to keep betting on stocks is the belief that the U.S. and global economies will continue to expand, helped by some interest-rate relief from central banks. If growth rolls on, corporate earnings also should grow, underpinning stock prices.
Overall operating earnings of the S&P; 500 companies rose 7.7% in the second quarter from a year earlier, according to data tracker Thomson Financial. Profit growth is expected to slow to 5.3% in the current quarter, then pick up steam to 11.7% in the fourth quarter, according to analysts’ estimates compiled by Thomson.
Some money managers say they’re worried about the stock market’s prospects for the next few weeks but expect a recovery in the fourth quarter.
David Doll, president of Kanaly Trust Co. in Houston, said the markets’ tumult in August may lead some investors in hedge funds -- the largely unregulated portfolios that have become drivers of market trends in this decade -- to pull their money out.
That could spur more selling by the funds as they raise cash to pay off investors, he said.
But Doll, who oversees about $2 billion in assets, said that another bout of volatility in the short term could make for more bargains in stocks, particularly in blue-chip names.
Looking to the fourth quarter, “our view is pretty bullish” on stocks, he said.
If investors’ confidence in the global economic outlook returns, Doll said, he expected them to rush back into shares of U.S. companies that sell goods or services worldwide, such as computer networker Cisco Systems Inc., heavy-machinery maker Caterpillar Inc. and conglomerate 3M Co.
“It could be ‘Katie bar the door’ on large-cap stocks by the end of the year,” he said.
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