Jill on Money: Will sizzling summer lead to a September swoon for stocks?

By Jill Schlesinger

Tribune Content Agency

 

So much for the summer doldrums! August 2014 was the best August for stocks in 14 years. The Dow gained 3.6 percent on the month to 17,098; the S&P 500 took out the psychologically important 2,000 level, rising 3.8 percent to 2003. Since the March 2009 low, the S&P 500 is up a staggering 195 percent, making the current bull market the fourth-best since 1928 in terms of both duration and magnitude, according to Bespoke Investment Group. The NASDAQ rose 4.8 percent on the month to 44-64, a 14-1/2 year high and just 11.5 percent below the all-time closing high reached on March 10, 2000.

  After last year’s sparkling 30 percent returns, few prognosticators predicted a subsequent buoyant year. Through August, the S&P 500 is up 8.4 percent, which has gotten some worried that the sizzling summer could lead to a September swoon for stocks. The fearful bears point out that stocks are trading at pretty hefty valuations. On the last trading day of August, the S&P 500 traded on Friday at 19 times its companies’ earnings for the past year, above the historical average of 15.5. 

  Another worrisome fact: the latest survey (through the week of August 27th) of individual investors completed by the American Association of Individual Investors showed that 51.9 percent of respondents are bullish, the first time above 50 percent this year and well above the long-term average of 39 percent. Meanwhile, bearish sentiment dropped to 19.2 percent, below 20 percent for the first time this year. These market sentiment surveys are often called “contra-indicators,” because when regular ol’ investors like us start to feel bullish, we are usually wrong. To wit, this most recent reading is the highest reading since the week of December 26, 2013, which preceded a 3.6 percent decline in the S&P 500 in January. 

  Need more? There has not been a full 10 percent correction in over three years – as a frame of reference, corrections usually occur about every 18 months. And while October market crashes may grab headlines (1929, 1987, 2008), September is actually the worst month for stocks. According to the Stock Trader’s Almanac, since 1950, the S&P 500 has recorded an average drop of a half of a percent in September.

  Before you hit the “sell” button, remember that just because a correction could be coming and September is historically a bad month, does not mean you should bail out. Oh sure, there will be those who will say that it’s a “stock-picker’s market” or that a managed mutual fund will be better able to absorb downward shocks, but that’s rarely the case; and the pundits doling out that kind of advice usually have a financial incentive to get you to buy whatever it is they are selling.

  None other than billionaire investor Warren Buffett weighed in on the managed versus passive argument in the latest Berkshire Hathaway annual report. Writing about the instructions laid out in his will, Buffett said his advice for the cash left to his wife was that 10 per cent should go to short-term government bonds and 90 per cent into a very low-cost S&P 500 index fund. He also took a shot at active management, warning investors that those who urge this method and the some ones “who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal.”

  The benefits of building a diversified portfolio of low cost index funds have been proven over time. Presuming that you have created an allocation according to your risk tolerance and personal goals and that you rebalance on a quarterly or semi-annual basis, there’s no need to change a thing when the calendar says “September,” when markets are reaching new highs or when they are correcting.