Wall Street enters the ‘sinister’ September, although seasonality is not what it was

Stock markets have closed a delicate August. July’s notable rally has faded as central banks, led by the US Federal Reserve, battle inflation. After having lost 3% in the most summery month and with less trading volume, Wall Street enters September with many doubts, a ‘sinister’ month for the markets in the eyes of history.

The second half of August has been a tough one for tech stocks and those hoping for a respite from declines shouldn’t relax just yet. September has historically been the worst month of the year for yields, suggesting caution as investors also face inflation and the Fed raising interest rates. Over the past decade, the index Nasdaq 100 has dropped an average of 0.6% during September, the only month of the year with a negative average. The technology-heavy index fell 5.7% in September 2020 and 2021.

The prospects for this September are not very encouraging. “Between the Fed, inflation and all the mixed signals we’re getting about the economy, we’re entering the month in a precarious position,” Ryan Detrick, chief market strategist at Carson Group Holdings, told Bloomberg.

Ryan Detrick (Carson Group): “Between the Fed, inflation and all the mixed signals we’re getting about the economy, we’re entering the month in a precarious position”

Tech weakness in September reflects a broader seasonal trend. This month has long been known as a bad month for equities, though analysts are struggling to say exactly why. Some say that individuals pay more attention to the market after the summer, selling stocks to lock in profits or book losses, while others cite mutual funds that start selling losing positions before the end of the year, which for some funds is in September or October.

“September has ushered in the worst S&P 500 returns of the year on average. The month averages a -1% return since 1928, with a ‘down’ month 54% of the time. overwhelming, but adds to an already cautious market narrative,” eToro strategist Ben Laidler said in a comment.

According to Laidler, the drivers of September’s weak seasonality range from the end of summer (85% of global assets under management are in the Northern Hemisphere) to tax loss collection and back-to-school spending. (it competes with Christmas as the most expensive event of the year for families). “The end of summer is a return to reality,” she synthesizes.

“Don’t blindly invest based on seasonality, but don’t ignore it either, given how bad September usually is, especially for tech,” adds Detrick. “The potential for more volatility looks quite high, and when you add in this seasonal downward trend, there’s a lot of risk for September.”

Laidler goes further arguing that “nothing this year has gone hand in hand with the stockings.” “More determining for our view of the glass half full will be the September inflation data and the outlook for a less aggressive Fed.” “For those still unconvinced of the fundamentals, September is traditionally followed by a positive October of +0.4% and an average 1-year yield of +7.5%,” she concludes.

Investors don’t seem to see it that way. According to Bank of America (BofA), the firm’s clients were net sellers of US stocks last week for the second week in a row.

Sensing the ‘pain’

Savvy options traders also seem to think more pain lies ahead. The number of outstanding bear option contracts in an ETF that tracks the Nasdaq 100 spiked on Aug. 19 to the highest level since the aftermath of the dot-com crash, and it’s not far off that level.

“Until we get past the Fed’s hawkish stance, which will be a long, slow process, I find it hard to see how we can get a clear runway for risk-aware trade again,” said Don Calcagni, director of Mercer Advisors investments. “I suspect we’ve bottomed out this year, but tech is still trading at a pretty significant premium and so I don’t think there’s enough appetite for it to roar back.”

Valuations are especially high for some of the biggest names in the market. Apple is trading at 24.7 times estimated earnings (PER), above its 10-year average of 16.7. Microsoft, at 25.1 times, is comfortably above its long-term average of 21.5 times. Some very high multiples for the ‘storm’.