The Cruelest Month?

by | September 6, 2021

Historically, September is the worst month for US and global equities. September (and October) is replete with market corrections, even some crashes. Since 1928, the average September return for the S&P500 is roughly -1%, which is remarkable given that the average annual return for US equities is firmly positive over the past 97 years. 

Those simple statistics have a way of focusing minds on what could go wrong, particularly after the stellar performance of global equities over the past 18 months. 

Yet despite the historic perils of September investing, prevailing market prices do not reveal much investor angst today. Anecdotally, investment banks and financial journalists are reporting renewed interest in hedging downside market risk. Yet broad measures of options market volatility remain subdued. For weeks, bond and currency markets have traded listlessly.

Perhaps the end of summer holidays will spark more activity, even a correction. Yet the absence of compelling investment alternatives to equities remains a key reason for calm market conditions. Shifts in growth or inflation expectations, which in any event have been small, only induce rotation and counter rotation within equity markets, not shifts out of them. Investors remain fixated on whether to hold growth or value stocks, cyclicals or defensives, developed or emerging markets. But their overall appetite for stock holdings remains largely unchanged. Equities are the only game in town when bonds offer punk returns. 

That behavior was on full display this past Friday, when the US August employment report came in much weaker than expected. The markets’ responses were slight, with bonds a touch weaker, the Treasury yield curve marginally steeper, growth stocks fractionally outperforming value or cyclical shares, and currencies largely unchanged.

Another reason why investors aren’t very concerned is that the news flow remains mixed. While US August job creation was well below expectations, weekly jobless claims have also fallen to pandemic lows. Last month job growth came to a standstill for in-person services such as dining or travel, but it rose in 8 of 11 surveyed industries. And the unemployment rate fell despite an uptick in job-seeking. In short, the labor market may not be as weak as the headline figures suggest.

Nor is one month’s data going to change minds at the Fed. To be sure, the Fed is laser focused on the job market, having declared last month that inflation has now met its tapering objective. But it is also true that the Fed needs to see more labor market improvement before it will taper—job gains must be ‘substantial’, not just ‘significant’ to use the terminology of Chairman Powell in his Jackson Hole speech. The Fed also looks at a myriad of labor market signals when determining the prospects for the economy and monetary policy. Fed officials will be keen to see if the expiration of extended unemployment benefits on September 6 induces more workers back into the labor market and alleviates some job rigidities that, alongside the Delta variant, may have also slowed hiring. 

Simply put, the September 21-22 FOMC meeting was never the most likely date for the Fed to announce its tapering decision. The November FOMC was always more likely, which gives the Fed and investors two more employment reports to review ahead of any determination to slow asset purchases.

Perhaps that is also why the bond market hardly budged following the release of Friday’s employment report. Also, bond investors are watching other developments. Senator Manchin’s request for a ‘pause’ in the consideration of the Democrats $3.5 trillion infrastructure package takes on added importance, given that passage rests on unanimous Democrat support in the Senate. In late September, a Congressional debate about lifting the debt ceiling and passing a full year funding bill will also garner bond investor attention. 

In the coming week the macroeconomic focus will shift to other regions, with incoming data from Japan, Europe and China making up for a holiday-shortened week in the US. Leadership change in Japan and public opinion polling ahead of the September 26 German elections (where the SPD is surging) will also draw attention.

In short, September offers many sources of news and potential surprises for policymakers and investors to digest. Still, it appears that the first half of the month—before German elections or a possible US government shutdown—will deliver more of the recent past: Few conclusive surprises and few reasons for investors to turn tail.

September 2021 may yet prove to be a cruel market month. But for now, it doesn’t look much different than any other month this year.

About the Author

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy.

Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland.

From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT.

At both GAM Investments and UBS Investment Bank Larry was widely recognised for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others.

Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

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