Are US stocks destined to repeat history?
September and October have tended to be the weakest months for US equities in the past
Many of us who live in Europe and the Americas are now marking six months since we started working from home to contain the spread of the coronavirus.
As if that weren’t enough to confirm the unusual nature of 2020, we now know that the second quarter was the worst on record for US gross domestic product growth. Yet, even as that data came out, the S&P 500 and Nasdaq indices each set a new high, with the latter now up by around one-third year-to-date.
A new bout of volatility that began a couple of weeks ago has investors asking: Is the market going to reflect the ground reality or is the real world going to catch up with the market?
History might be cause for concern. September and October have tended to be the weakest months for US equities. Although November 1929 and April 1932 are the two worst months for the S&P 500 since 1900, October has generally suffered the largest number of double-digit losses (in eight years out of 121). The average October return since 1900 has been -0.29 per cent. The worst days of the 2008 – 09 financial crisis, Black Monday of 1987 and the banking crisis of 1907 all fell in October.
While history isn’t destiny, this autumn promises more than its fair share of hazards.
Even before the results of the US general elections are out, politics in the world’s largest economy could unsettle markets. Facing a $1 trillion (Dh3.67tn) chasm in their negotiating positions, Democrats and Republicans may fail to deliver a new fiscal stimulus. Elsewhere, Japan is set for some leadership uncertainty after a long period of stability and progress under Prime Minister Shinzo Abe; while an October deadline looms for post-Brexit trade talks, currently snagged on the thorny issues of state aid, regulatory alignment and fishing rights.
Lest we forget, coronavirus is still with us. This summer, we have already seen a second wave of infections as lockdown restrictions were eased. But events like schools and universities reopening, more people returning to their workplaces, colder weather and, in the US, the interstate holiday travel associated with Thanksgiving and Christmas could all lead to a resurgence in new infections. At the same time, progress on vaccines and antiviral treatments provide upside for the economy and markets.
In addition to the health situation, as workers’ furlough periods come to an end, the long-term impact of this crisis on the job market is becoming clear. Persistently high US initial jobless claims and recent consumer cutbacks on groceries and other essentials may be early signs of that.
With all of this to come, there may be little time to enjoy the fact that the S&P 500 had its best August since 1984, finishing the month up 7 per cent. An autumnal chill may already have descended with the recent sharp sell-off.
A case can certainly be made for current index levels. Economies are poised to snap back hard once a vaccine is developed. Central banks look to be more accommodative for the longer term. A weaker dollar is also a tailwind, particularly to non-US markets.
The rally has been led by big technology names that offer exposure to long-term growth themes that, if anything, have been accelerated by the recent shift to working and shopping from home. Today’s valuations are not at the irrational levels of the tech bubble 20 years ago: Microsoft may now trade at 32 times next year’s earnings, but during 1999-2000 it had a multiple in the mid-60s. Cisco Systems, one of the high flyers back then, hit a high of almost 130 times its earnings.
Nonetheless, valuations in certain stocks—often favourites among a new cohort of bullish retail investors—do appear frothy. And while surveys of institutional investors indicate relatively conservative positioning in general, hedge fund strategies, in particular, look extended.
It is also worth recognising that big tech, which bore the brunt of the recent selling, is the new punching bag for both Democrats and Republicans in Congress. The chair of the US Congressional Subcommittee on Antitrust, Commercial and Administrative Law has signalled that it will report its findings on the market dominance of Amazon, Apple, Facebook and Google next month—another addition to the list of stumbling blocks this autumn.
These stumbling blocks may be why, even as equities reach new highs, the CBOE volatility indices for both the S&P 500 and the Nasdaq have also been edging upward. Investors appear to be hedging for volatility over the coming weeks. It’s going to be an eventful one.
Joe Amato is chief investment officer of equities at Neuberger Berman, a member of The Gulf Capital Market Association.