Yesterday I spoke with Jo Ling Kent on Fox’s Risk and Reward about what investors might expect for the rest of September and into the remainder of 2015. I suggested that after a rough September, further market correction is likely ahead. Investing is all about probabilities, there is no sure thing, at least not legally, so as investors we need to look at what is most likely.
Historically the latter part of September has seen negative returns across on sectors, on average, with the one exception of Consumer Staples, which has a median return over the past 10 years of 0.1%, according to research from Bespoke Investment Group. All other sectors have negative median returns with reliable consistency as the percent of times they are positive is less than 50%. For example, Energy has generated positive returns only 20% of the time, (with a median return of -1.9%) and technology only 30%, (with a median return of -1.4%).
With that historical context, I also add in how concerned I am with the upcoming earnings season and what affect it will have on stock prices, given that we are already getting early warnings from companies ranging from Citibank to seeing further declines in Caterpillar sales, down 33 months in a row; an unprecedented decline.
Now we need to look at the impact of the Fed’s decision last week to not hike interest rates. In the short-term what makes markets move is solely investor attitude toward risk. We’ve seen a lot of complacency and comfort with elevated levels of risk thanks to the prevailing narrative of a Federal Reserve put on the markets and a believe that loose monetary policy would pump life into the economy. What we are seeing now is an unraveling of that tale.
For those who were surprised that the market did not react positivity to the lack of a rate increase, you need to look at the market’s current attitude towards risk, which has shifted significantly towards risk-off. When investors are risk-on, easing tends to be very favorable for the stock market as investors hate sitting in a pool of excess risk-free, low-interest rate liquidity and so they buy, buy, buy! But once investors become risk-averse, Fed easing has no positive impact on aggregate stock prices because that pool of excess liquidity looks awful comforting when risk-off is in the air
The market right now is very confused. The Fed essentially to the market, “I love you, you’re wonderful, but I think we need to slow things down.” The only defense of the Fed’s inaction seems to be that nearly a decade of monetary perversion of interest rates hasn’t yet worked, so we are going to keep doing it! Naturally!
Going forward I expect that
- The headline economic numbers, both domestic and globally, will continue to weaken.
- The market and the Fed will realize that the opportunity raise rates passed them by.
- Unless something unexpected ignites a sustained risk-on mode in the markets, the Fed may even be pushed into another round of easing as pain form a strong dollar mounts while other major economies work to devalue their currencies.