Andrew Pyle
August 31, 2023
Can stocks make it four quarters in a row?
As we are heading into the Labour Day weekend, we thought we would publish this week’s newsletter a day early, especially with the weather in the coming days becoming more becoming of summer. Before I dive into the discussion, I would be remiss if I didn’t wish my daughter, friend and business partner a very happy birthday. At the same time, I was very proud to hear that my other daughter was offered the position of Sustainability Manager at the Fairmount Hotel.
They say stock traders have short memories and this is true for some investors too, which explains why August has been marked with so much negative rhetoric. Barring a major move higher today, this will be the first losing for the S&P500 month since February (though not the first for the Dow or the TSX). Concerns over Chinese economic growth and higher for longer interest rates have definitely pierced the balloon of euphoria that carried us into the summer.
With one month left to go in the quarter there is a limit to how disappointed investors should be. The major North American indices are still showing a gain from the end of June, though the bounce in the past several sessions definitely skated this third quarter story on side. A couple of weeks ago, we were looking at the first quarterly decline in the S&P500 in a year and the same held true for the TSX. With a month to go before we close the books on the quarter, what should we be looking at?
Let’s begin with seasonal factors. It is true that September and October can be problematic for equity markets and this was definitely the case last year. That said, the statistical evidence for this coming autumn season being significantly more risky than other periods is slim. For sure, 1987 and 1990 stand out as years where markets experienced a major shakeout and memories of those events may have had a lingering effect on investor psychology going forward. In other words, if you truly believed that the autumn months posed a higher level of risk then you might feel the need to sell and, if multiplied across investors, this could sway the numbers in favour of stock market weakness.
What I find interesting is that there has been a greater incidence of equity weakness in the month of September than October, even though the latter month occupies more of the recent history books. If we go back to 1960, there have been 38 years where September saw a decline in the Dow Jones index, versus 34 years for the S&P500 and TSX. This means that we have seen September pullbacks 60% of the time for the Dow and 54% for the TSX.
If we extend the analysis to movements in markets during the September-October period, relative to August, the numbers are even less conclusive. For the Dow, the number of times we have seen a net decline in the index from the end of August to the end of October only 51% of the time. The incidence drops to 44% for the TSX and only 35% for the TSX.
The problem with seasonality analysis is that it assumes that every year shares the same characteristics as the other. It is ignorant of economic cycles, changes in monetary policy, elections, geopolitical developments, etc, etc, etc. Last year, we experienced the most aggressive rate hikes since the 1990s and this was expected to lead to a certain recession in 2023. Yet, we had residual cash built up from pandemic relief measures and we had a consumer that was riding a wave of pent-up demand from that pandemic. There was more concern over the fate of growth stocks (including tech) in the autumn of 2022 than the U.S. banking sector, but the tables have turned this time around.
Based on recent labour market and consumer confidence statistics, the largest engine of growth in the North American economy might be gearing back as we head in the final few months of the year. Tech sector is still considered to be overvalued by many, but an important shift took place this week – ironically from a spate of weaker than expected economic data points out of the U.S. The ADP payrolls report for August showed a rise of only 177K – well below forecast and a pace that was the lowest since back in March. The JOLTS job openings report for July came in at 8.827 million – the weakest since March of 2021. This is the labour market transition we knew would eventually take place. Firms that were once afraid to let go of workers because there might not be one to replace that position down the road are now in a different environment. Given the need to protect margins from higher costs and now seeing a cohort of people that can no longer opt out of working now that their debt servicing costs are rising, staffing positions can be reined in.
Tuesday’s Conference Board consumer confidence index also came in well below expectations at 106.1, with declines in both the present situation and expectations components of the survey. This would suggest that consumers are responding to a shift in the labour market, which is somewhat surprising given that the headlines have been filled with unions winning major wage and benefit concessions from large corporations. Perhaps they know what usually comes next. Higher wage costs at one end of the spectrum leads to labour reductions at the other, or higher potential inflation from such costs lead to a continuance of tight monetary policy and an increasing share of household disposable income going to pay interest and debt.
I think that September is a coin toss in terms of whether it will offer investors a fourth straight quarterly advance in stocks, but the risks are very much congregated around the margin. Ignoring the Russian-Chinese headlines, there does not appear to be a driver for a sudden massive correction, nor the impetus for stocks to stage a major advance into year-end. Remember also that we still have three weeks until the next FOMC meeting. There are pockets in the Canadian market that offer opportunity for short-term capital appreciation and income, while the bond market remains a place where we continue to put cash to work.
On behalf of the Pyle Group, have a wonderful long weekend.
Andrew Pyle
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