Clear With a Chance of Storms on the September Horizon

by Dan Wiener | September 6, 2012 7:02 am

Batten down the hatches. No, I’m not talking about hurricanes, though Isaac did leave a bit of devastation in its path. I’m talking about September.

Yes, it’s been a wonderful summer. After a couple of dreadful ones (remember the debt-ceiling debacle?), we came through 2012’s with nary a scratch. The stock market defied its historical leanings of the past couple of years by jumping rather than tumbling as the heat built.

Despite data that shows our economy grew a bit faster than originally estimated in the second quarter, early signals that back-to-school sales were better than expected and a virtual promise from Fed Chairman Ben Bernanke that more stimulus is in the cards, I don’t think September will be as benign.

First, Europeans will be back from their long August vacations, and I expect TV, radio and Internet outlets to ratchet up the noise, if not the news, on how dire things are looking there, particularly leading up to a Sept. 12 decision by a German court on the constitutionality of a key euro-zone funding mechanism. (Sept. 12 is also when the Fed will next meet and, presumably, announce a QE3.)

Second, the real political mudslinging is going to start now, with just two months until what could be the most partisan and divisive election we’ve seen in decades.

Plus, there’s the historical trend: September is traditionally the worst month for the stock market, yielding small losses, on average, versus gains for most other months. I’m not one to suggest you go to cash and head for the hills, but I do think you have to be mentally prepared for crosswinds and headwinds.

Here’s why: As I’ve said many times over the course of this year, while the major market indexes remain below their all-time highs (at August’s end the Dow and the S&P 500 were 7.6% and 10.1% below their Oct. 2007 highs), on a total return basis we’ve already hit new highs (23 for the Dow so far this year). Total Stock Market (MUTF:VITSX[1]) ended the month just 0.7% below its all-time high, and Health Care (MUTF:VGHCX[2]) is even closer.

If you’ve looked at your account statements lately, you probably know that you’re as rich as if not richer than you’ve ever been, assuming you didn’t take any money out of your portfolio during the past five years or so. That said, the issue with new highs is that, once hit, there are only two paths the future can bring — a rally to another new high, or a fall below it.

And human psychology being what it is, investors just hate falling below any high-water mark, no matter how ephemeral. So, steel yourself, because I think September’s going to be a bit rougher than August.

I know a few of you might be looking for a “quick trade” or some other means of side-stepping whatever carnage the future holds. But what if I’m wrong and some economic signals or signs of renewed vigor in Europe turn the threat into a treat? Rather than try to time the market, I’ve always felt it was better to use time in the market to make hay, even if the occasional rain dampens our harvest and enthusiasm.

It’s often temporary and, as I noted, we’re still making darned good money by hewing to a well-chosen and disciplined investment model. As for those who’d dive into “fear trade” assets, take a look at Precious Metals & Mining (MUTF:VGPMX[3]), which is off 18.8% for the year through August. That’s not my idea of comfort. Plus, I think the gold bugs may finally have gone too far: A recent article in Investment News tells of gold buyers burying bars and coins in distant corners of their properties in the dead of night as “insurance.” Crazy!

Energy (MUTF:VGENX[4]) and Energy ETF (NYSE:VDE[5]) also haven’t exactly been burning up the track. You might have thought that Hurricane Isaac would boost prices a bit. Hardly. The funds are near the bottom of the performance barrel so far this year, up just 0.9% and 2.5%, respectively.

One last note on September: Unless the month turns into a disaster, you can expect to see some nice improvements in a number of funds’ 10-year returns at quarter-end. Why? September 2002 (when Total Stock Market, for instance, dropped 10.1%), which marked the end of the 2000–2002 bear market, will fall out of the 10-year calculation.

Two dozen other Vanguard funds did even worse in September 2002, including European Index (MUTF:VEURX[6]), off 13.1%; Windsor (MUTF:VWNDX[7]), -12.9%; and Capital Value (MUTF:VCVLX[8]) and International Growth (MUTF:VWIGX[9]), both down 12.0%.

I should note that 10-year returns have already seen big improvements since much of the Tech Wreck bear market has been falling out of the calculations. Since the end of 2011, the annualized 10-year return for Total Stock Market has jumped from 3.8% to 7.2%, further evidence that rolling returns analysis is a better way to assess fund and manager performance than point-in-time returns.

  1. VITSX:
  2. VGHCX:
  3. VGPMX:
  4. VGENX:
  5. VDE:
  6. VEURX:
  7. VWNDX:
  8. VCVLX:
  9. VWIGX:

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