The Bumpy Road Back to “Normal”
September lived up to its reputation as the worst month of the year. While several of us in the office who celebrate birthdays this time of year remain partial, it is an inescapable fact that September holds the distinction of having the lowest monthly return, on average, going back to 1928. Over the past 94 years, the stock market has averaged a loss of 1.1% in September. The other two months that have averaged negative returns are February and May, but the magnitude is much smaller at -0.1%. (Data according to Yardeni Research, Inc.) This year, the S&P 500 posted a decline of 9.34%, which was the worst month since March of 2020 when the S&P was down 12.35%, and the worst September since 2002’s 11% drop.
For the first three quarters of the year the S&P is down 24.77%. The last time the market was down more over the same stretch was also back in 2002. The silver lining… in that year the fourth quarter ended up by 7.92%.
The September sell-off actually began in late-August when Fed Chair Powell laid out a hawkish tone on interest rates to battle inflation. While it should come as no surprise that the past 13 years of ultra-low interest rates and generous levels of monetary stimulus eventually had to come to an end, the path back to “normal” has been anything but fun. Both stocks and bonds have had negative returns for three consecutive quarters, the first time in history both asset classes have declined in unison for that long.
For the first nine months of 2022 the volatility of the stock market has reached levels that have not been experienced since the Global Financial Crisis.
So, what does this mean for investors? Jack Hough, who writes the Streetwise column in Barron’s summed it up nicely in the September 26th edition of the publication. “I don’t want to set off a panic, but financial markets appear to be careening toward normal. If left unchecked, ordinary assets could soon reach price levels that imply adequate long-term returns.” Compared to where markets were at the beginning of the year, it is now easier to find places to invest with some degree of certainty and still earn returns that don’t begin with a zero in front of the decimal point. Yields on U.S. Treasury securities are back to levels that haven’t been seen in over a decade. Compared to even the end of last year the fixed income landscape has become more attractive.
And, as we pointed out in a recent blog post, one of the pros of higher rates is that you can now earn interest on your cash again.
The stock market may not provide the same level of clarity, but with all of the major indices down 20-30% from previous highs and many individual stocks down even more, much of the froth has been taken out of the market. While we do not assume to know if the lows are in for this cycle, we can make a reasonable guess as to what returns might look like as we move forward. The table below provides the price return needed to return to the January 4th, 2022, closing high on the S&P 500. Add on the current dividend yield of 1.88% as of September 30th and the argument strengthens for continuing to favor stocks.
Bear markets are a fact of life when it comes to investing in stocks. While they are never pleasant, they eventually come to an end and the market has always gone on to reach new highs. In the short run anything can happen, but if your time horizon stretches beyond the near term, markets may very well be closer to “normal” than they have been in some time.
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