Martin Pelletier: Remember that healthy markets go through cycles and not every pullback leads to a full-on crash
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Sep 28, 2020 • • 3 minute read
Markets appear to have lost their inner Zen once again as we head into the final months of the year. We find it rather interesting how this seems to play out every autumn with September being the weakest month on average since 1950.
In can be a particularly cruel month coming off a strong August: According to LPL Research, the last two times we saw gains of more than five per cent in August were 1986 and 2000, and the S&P 500 went on to lose 8.5 per cent and 5.4 per cent, respectively, the following month.
Markets have been exhibiting similar weakness this September. So far the S&P/TSX is now down nearly 6 per cent from its August highs, pushing it back to beginning of June levels, while the tech-heavy S&P 500 has given up 10 per cent over the same period. As a result, the TSX is down 7.5 per cent this year-to-date while the S&P 500 is now down nearly one per cent sending it below its 50-day moving average for the first time in five months.
Aside from seasonal weakness, there is also additional reason to be wary this year due to the upcoming U.S. election. According to LPL, the S&P 500 has posted an average decline of 0.2 per cent in September and 0.7 per cent in October in years when Americans go to the polls to elect a new leader.
Maybe it’s because of human behaviour that we tend to be more negative once we return to the daily grind following summer holidays. It also doesn’t help that the days are getting shorter and the temperatures cooler.
But despite the additional risks tied to the election and the potential for a second wave of COVID-19, it’s important to remember that healthy markets do go through cycles and not every pullback leads to a full-on crash. In today’s environment, we think the herding into the tech sector got ahead of itself especially when you see things like Zoom’s valuation being higher than Exxon Mobil or companies like SPI Energy seeing their share price rocket by more than 4,000 per cent on news that they have “launched” an electric vehicle division.
That said, we just don’t see a fundamental shift especially when trying to take an objective view of other areas of the market and economy.
For example, on Thursday new single-family house sales for August were released showing that they surpassed an annual rate of 1 million for the first time in 14 years, and are up a whopping 43 per cent from last year. There have also been positive signs on U.S. consumer spending.
Then you have the Federal Reserve continuing to pump a record amount of capital into the system and the expectation that the central bank will not raise interest rates until 2024 at the earliest. Most importantly, fiscal spending programs are setting new records globally with governments throwing everything they have at the virus. Perhaps this is why some stocks that serve as leading economic indicators, such as Caterpillar, continue to move higher and have recouped all of their losses.
Meanwhile, we’re keeping a close eye on credit spreads along with Treasury yields that so far appear stable and showing its business as usual, which wasn’t the case as markets began collapsing back in March.
Unless this changes, any further selling especially among sectors outside of technology, could represent a good buying opportunity for those willing to put their near-term negative emotions aside and start playing the long game.
Martin Pelletier, CFA, is a portfolio manager at Wellington-Altus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.