Futures Outlook - An Excerpt from CRB'S Futures Market Service
The dreaded two-month period of September and October has arrived for the stock market
The dreaded 2-month period of September and October has arrived. September is the worst month of the year for the S&P 500 with an average loss of 0.62% over the period of 1950-2009. October is actually the seventh best month of the year with an average gain of +0.61%. However, October is notorious because there were massive declines in October of 16.9% in 2008 during the 2008/09 financial crisis and 21.8% during the 1987 stock market crash.
The stock market just ended August down 4.74%, which was a much weaker performance than the average monthly gain of 0.13%. In a sense, the decline in August means that the stock market comes into September at an already-low level that provides some protection against further losses. The stock market in the first two days of September has shown a sharp gain of 3.9% as the market was heartened by better-than-expected purchasing managers reports in the US and China..
The US stock market also has somewhat of a cushion from the fact that the forward price/earnings ratio is very low at 13.07, well below the 10-year average of 15.3. As long as earnings expectations do not fall off a cliff, the market is valued at a reasonable level. The market is currently very worried about the economy and the talk about a double-dip recession. But this also means that it won’t be hard for the US economy to beat the market’s poor expectations.
Still, the last two years if nothing else have shown that all kinds of events can come out of the woodwork to shoot down the stock market. The housing and mortgage bubble turned into the worst financial crisis since the Great Depression. More recently, the European debt crisis exploded this past spring to force a big sell-off in stocks. The US economy still has major problems including a massive budget deficit (with no fix in sight), a big tax hike coming on Jan 1 for those earning over $250,000 if the Bush tax cuts are not extended for those earners, a housing market that has yet to prove a bottom, and a Federal Reserve that can only push on a string. Traders and portfolio managers will therefore have a quick trigger finger on any hint of trouble in September/October.
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