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US investors who keep a close eye on the calendar are starting to batten down the hatches. Since 1900, only four in every ten Septembers have posted positive returns and the average monthly performance has been –0.2%. October can be rocky too: the 1929 and 1987 crashes both happened in October, and the average monthly change is just 0.2%.
Seasonal history aside, though, “there’s plenty to worry about”, as ES Browning notes in The Wall Street Journal. Hopes that the Fed might be close to ending its rate-hiking campaign have bolstered stocks of late, but it’s now clear that there is more tightening ahead. Overall, year-on-year earnings growth is down from last year, while an uptick in insider selling is also grounds for caution. And the market remains overpriced. That presages trouble ahead: valuations post-bubble always gradually revert to the long-term average, and often fall below it.
There's another disturbing statistic to consider. Since 1990, the S&P 500 index has mirrored the behaviour of the Nikkei 225, with a ten-year time lag. The Japanese investment bubble of the 1980s engendered a debt-financed spending binge, and once the bubble burst, the government made more credit available and juiced public spending in a vain attempt to counteract the effect of consumers trying to pay down their borrowings.
The US boom of the 1990s was also investment-led, and the Fed’s prompt rate cutting may simply have put off the day of reckoning by encouraging ever more debt-fuelled consumption. A Japanese-style deflationary slump is a distinct possibility as consumers get buried by their borrowings; Dailyreckoning.co.uk recently highlighted the fact that the portion of Americans’ disposable income devoted to paying off their debt is at a record high, even though interest rates are near record lows.
The Japanese boom was accompanied by a real-estate bubble that burst a few years after the market peaked and exacerbated the downturn. And its bubble of the late 1980s occurred as the largest segment of its population reached 45-54, the peak spending years; after that, people begin to save for retirement and sell out of stocks. It was the same story in the US ten years later – spelling bad news for US stocks
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Andrew Van Sickle
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