Flipping the calendar to September often seems to engender the feeling of a fresh start. A new school year, a new football season, and (usually) a welcome break from the hot, humid dog days of August. For most, September is an enjoyable month, but historically September isn’t a great month for investors. According to the Center for Financial Research and Analysis, September was the worst month for the S&P 500 Index between 1945 and 2017, with an average return of -0.62%. And in recent years we’ve witnessed some truly awful events in September – the 9/11 attacks in 2001 and the Lehman Brothers collapse and subsequent financial crisis in 2008. Both led to sharp drops in stock markets worldwide.
This September, investors are confronting the fact that this nine-year bull market is now the longest in history. Add to that the uncertainty stemming from the ongoing trade war and upcoming mid-term elections, and it’s easy to understand why some are unsettled. Indeed, there is no shortage of predictions that a bear market may be just around the corner.
At moments like this it’s important to take a step back and get a little perspective. We believe investors can, in fact, enjoy that high school football game by taking the long view.
Enduring Inevitable Market Cycles
First, we do NOT believe it is “news” to state that we will endure another bear market. The question is not “if,” but “when.” Predicting another bear market is akin to a broken clock predicting it will be midnight again – wait long enough and the broken clock will be correct.
So we think it is well worth revisiting the fundamentals of what drives security prices at the most basic levels. In short, security prices are a discounting mechanism. Over the long term, the price of a security, and the collective price of all securities (the market) is nothing more than the sum of discounted future cash flows. Price fluctuations day-to-day are almost meaningless in this context. In fact, a great way to think about daily or even weekly market moves is to think of it like the weather. Just because it’s 90 degrees and sunny in Ohio this week doesn’t mean you can conclude it will be like that forever into the future.
It’s not a stretch to say a bear market will come at some point, but predicting the timing is something altogether different. We are by no means “calling” a bear market in the coming days. We don’t believe such market-timing predictions are necessary to be successful in the long run. It’s more prudent to invest for the long term according to each client’s personal situation and goals, not according to bull-market anniversaries, short-term shifts in the political winds, or obscure patterns in month-to-month averages.
Some Statistics to Consider
In taking this approach, history is on our side. There are many statistics that could be cited here, but two key numbers support the view that it’s worth enduring stock-market volatility in order to achieve returns that outpace inflation.
The first number to consider is 3.3. This represents the average number of years it took for the stock market to hit a new high after suffering a 20% decline (since 1926; Source: Mark Hulbert, Wall Street Journal March 7, 2014). If a portfolio has enough conservative investments like bonds and cash to generate the needed cash flow for that amount of time without selling stocks, it can successfully withstand the typical bear market.
The second number to consider is 84%. This represents the percentage of time since 1918 that the stock market produces a positive return for a rolling 10-year period (Source: JP Morgan research). This means more than eight out of ten times, if one stays invested in the stock market for 10 years, the value of the stocks in the portfolio would have increased. This percentage improved to 88% for rolling 15-year periods.
What’s the lesson here? In order to take advantage of the long-term growth prospects of investing in capital markets, we must be willing to endure sentiment-driven, short-term volatility. Such volatility can be unsettling and sometimes downright scary. In such times it’s critical to focus only on what is within our control. There are so many things we can’t control, but a few important items that we can. For example, we can control asset allocation, spending, taxes (partially), retirement planning, and distribution strategies.
Of these, the most applicable factor as it relates to historically-choppy September is maintaining a sufficient amount of conservative, “shock-absorbing” assets like bonds to offset volatile, higher-growth assets like stocks. When properly implemented, a wise asset allocation strategy can help us look beyond the headlines blaring the latest crisis and enjoy the many good things September brings.