Investment Insights
Gregory M. Drahuschak

Supposedly those who do not learn from history are doomed to repeat it.  History at times, however, can be misleading.

Due to some significant market bottoms set in October, many investors view October as the worst month of the year, but that dubious distinction belongs to September.
Going back to 1928, September has produced an average 0.57 percent loss, which far outdistances February’s average 0.03 percent loss.  These two months are the only months with average losses.

The S&P 500 did not reach its current configuration until 1950.  Unfortunately, considering only data from that year until now does not show improved results.  From 1950 through last year, the S&P 500 has an average 0.61 percent loss.  September also is the only month where the odds of the S&P posting a gain are less than 50 percent (43 percent).

In the months in which the S&P 500 has posted a gain in September, the average increase has been 3.12 percent.  In losing Septembers, the S&P on average has fallen 3.43 percent.

Historically it has not mattered whether you were a large or small cap stock owner.  Both were treated poorly in September although for small caps September was only the second worst month.  July has been the worst month for small caps.
Despite September’s long-term record, it is interesting that the S&P 500 has posted gains in the month every year since 2003. Additionally, in the election years since 1944, the S&P 500 has posted an average 4.4 percent gain in September.

In the last few years, however, seasonal factors have had much less than their normal influence on trading.  August was hit with an onslaught of negative news including the late-month threat of a major hurricane hitting the Gulf coast, but despite this, August bucked its historic trends as the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite all posted gains.  On average since 1950, the market has posted a fractional loss in August.

September this year will be driven much more by other factors that could allow the S&P to fare much better than history suggests it might.

Mark Luschini’s article in this month’s Investment Perspectives addresses one of this month’s key issues.

As Mark points out, the dollar has been on the rise and there are solid reasons to think that it can continue its upward movement.

Although many U.S. firms have benefited from the lower dollar, which has lifted U.S. export volumes, over the long-term, the U.S. equity market tends to perform better in periods when the dollar is strong.

Guy Lebas addresses the second major issue that could impact stocks this month.
The fate of the Government Sponsored Enterprises, Fannie Mae (FNM) and Freddie Mac (FRE) will be significant.  Our view is that there is a wide range of outcomes that would be acceptable to the market if the resolution looks like it can remove the issue from daily headlines.

Considering  recently reported data on the U.S. Gross Domestic Product, various manufacturing measures, consumer confidence and durable goods orders,  it probably is not merely coincidental that August trading suggested that the market was trying to establish a base that could take the S&P 500 up and out of the trading range that has constrained the market for many weeks.

While the market appeared to spend most of August base building, we would not anticipate that any upside move will be strong enough to break the upper boundaries of a long-term trend channel just above 1400.   The primary reason we suspect this level represents an optimal intermediate-term objective is that the problems that have plagued the market for many months are far from being totally resolved.  Even a favorable resolution to the GSE situation only would be one step toward easing the credit problems and the housing malaise. In addition, there is overhead technical resistance in the Dow and S&P 500 that could be restraints as we move toward the end of this year.

If energy prices continue to fall, market and consumer sentiment could improve significantly, which on a short-term basis could provide a catalyst for the market to edge above the prior trading range. Remember that the slide in the price of gasoline from its July peak potentially has added approximately $100 billion dollars to consumer spending in areas other than energy.  Although there are many credit market issues remaining, the market at the start of September suggested there was a growing feeling that the worst of the news is behind us. 

Sector activity could provide a good hint that the market is ready to embark on a longer-term recovery. 

We would be watchful for a major change in sector leadership.  Rallies led by energy and materials would not indicate that the market’s prior biases have changed.  After all this time of lackluster market activity, new leadership is almost a requirement for the market to establish a durable upswing.

At worst the market could remain in an extended period of base building.  How soon the market can move out the current range could depend heavily on the fate of the dollar and how long it will take the market to discount a resolution to the credit issues.