Historically, September is seasonally weak for the market and considered the worst month of the year for stocks. This year, that dynamic could be exacerbated by another expected Federal Reserve interest rate hike to fight persistently high inflation — the byproduct of which would be to tap the brakes on an already slowing economy. In a recent research note, Goldman Sachs Asset Management explained how investors are facing “inflection points,” such as macroeconomic changes, adoption of new technologies and a shift in central bank monetary policy; all of which create new investment opportunities but can also make for difficult transition periods for some companies. “As inflation continues to run high and real wages struggle to keep pace, some companies are already struggling to pass on cost increases to consumers, which may result in a reset of corporate profitability with negative implications for equity prices,” the Goldman report said. “We ideally want to hold companies that can adapt to these new conditions while staying nimble and effectively managing expenses.” We couldn’t agree more. Earnings guidance for the second half of the year is coming down as companies feel pressured by the current environment. At the Investing Club, we’ve repositioned the portfolio into higher-quality companies with great balance sheets to withstand the many of the challenges ahead. However, we must acknowledge that if the market continues lower from what looks like a losing month of August, we’re going to experience some pain. August, a historically higher month, is entering its last day Wednesday on a three-session losing streak. But as demonstrated recently, we see market downturns as opportunities to buy shares of high-quality companies at better valuations. For example, we added two stocks to the portfolio last week: coffee giant Starbucks (SBUX) and off-price retailer TJX Companies (TJX). We bought more shares of each on Monday and Tuesday. Where we are, where we’re going After falling almost 21% in the first half of 2022 — its worst start to a year since 1970 — the S & P 500 hit a bottom of 3,636 on June 17 and proceeded to rip higher to 4,325 on Aug. 16. But as of late, the index has been heading lower. In fact, it’s dropped about 8% in the past two weeks. On Friday, a market wishful for a tamer tone from the Fed, plunged after central bank chief Jerome Powell warned of “some pain” ahead as monetary policymakers grapple with stubborn inflation. Now comes September. According to data by Yardeni Research , the S & P 500’s average percent change from 1928 to 2021 has been a loss of 1% in September, the worst of any month. Over that period, September has been lower 51 of those years, the most of any month, averaging a 4.6% decline in those down years. (May and October, both lower 39 of those years, had slight worse average returns of 4.7% in their down years.) There aren’t particular reasons why September tends to be a drag on stocks. But as Jackson Square Capital’s Andrew Graham pointed out in a CNBC commentary , it’s widely thought that investors who come back from summer vacation may readjust their portfolios before the end of the year by selling positions to take some profits. Another theory has to do with corporate buybacks. Generally speaking, companies are restricted from buying back their own stock two weeks before the end of their quarter. Since many companies are October quarter end, the market loses the support of buybacks starting those last two weeks of September. Of course, history may not repeat itself. It’s worth noting that the S & P 500 from 1928 to 2021 was up 42 of those years, according to Yardeni, with an average return in positive years of 3.2%. This week, Jim Cramer highlighted analysis from market technician Larry Williams who said the market could end the year in an uptrend. When comparing the Dow Jones Industrial Average ‘s 2022 performance with previous years, Williams found that the Dow’s performance in 2014, 1962 and 1891 all showed positive trajectory that resembles 2022’s performance. When the charts are compared, they convey that the rest of the year could end in a rally. Another key event later this year for investors to watch is the midterm elections, which could impact the control of the House and Senate. There tends to be a lot of volatility heading into midterms, which is historically followed by a rally after elections regardless of outcome. According to Yardeni Research, the S & P 500 during midterm years since 1951 tends to be higher 12-months after the elections. Bottom line We obviously can’t control the market, but we can control our strategy. We have been shaping our portfolio around companies that can historically hold up in tough environments. We’ve high-graded out of names wrong for the times into some defensive sectors like health care and consumer staples; names like Johnson & Johnson (JNJ), which we bought some more of Monday. We’re also looking at downturns as opportunities to add to our high-quality tech names. On Monday, for example, we also bought more Microsoft (MSFT) and Amazon (AMZN) in the teeth of a broad tech sell-off. (Jim Cramer’s Charitable Trust is long SBUX, TJX, JNJ, MSFT and AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Jim Cramer at the NYSE, June 30, 2022.
Virginia Sherwood | CNBC
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