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Written by: Eugene Peroni, Peroni Portfolio Advisors
Autumn often ushers in a period of heightened volatility for stocks and September statistically is the worst month for the market. This year has illustrated just how difficult September can be. The expansive trading swings that marked the end of summer and the beginning of the fall season were driven, in part, by increased calls among market observers for as much as a 20% decline. Those who have watched the financial markets for years, however, know too well that such widespread predictions for a decline are seldom accommodated on a timely basis as stocks often defy widely propagated prognostications. I believe a steep and sustained pullback will be suspended if, for no other reason, because it is so anxiously anticipated by many traders.
There may be other reasons not to be overly concerned about a major setback from these levels. Newswire headwinds which spurred sweeping consolidations among core growth categories in September were not attributable to surprise developments that caught investors off guard. The delta variant of COVID-19 continued to be an ongoing issue that placed more attention on supply chain disruptions globally. Supply chain factors have already triggered harsh reactions in some retail and shipping stocks – areas expected to be particularly vulnerable to this unabating problem. Yet, in numerous cases Consumer Discretionary stocks have been in persistent downtrends for months. Therefore, an argument can be made that the market may have discounted supply chain problems ahead of the third quarter earnings reporting season. Also, industry analysts have presumably reined in their forecasts as a result of supply complications, potentially setting the stage for another positive quarter of earnings “beats” relative to Wall Street forecasts.
While another ongoing concern has been the anticipation of Fed tapering and the attendant perceptions of rising inflation and higher interest rates, it remains uncertain that nascent economic data trends are beaconing a stage of rampant inflation. Economic data and anecdotal observations point to burgeoning inflationary patterns, but inflation-sensitive industry sectors do not seem to be reflecting perilous prospects for equities. This could mean the market senses either inflation is not as ominous as economists believe, or that the Fed may not act preemptively to strike down the specter of runaway inflation. The market’s resilience since the Fed announced its tapering intentions months ago suggests a glass-half-full scenario where investors may be interpreting tapering as a constructive sign that the economy can grow without further record stimulus efforts.
Finally, ongoing rotational consolidations may have effectively addressed the price and sentiment excesses market naysayers have lamented for months. In fact, some stocks in the “momentum” growth areas have fallen into correction territory (greater than 10%) without disrupting the market’s basic uptrend or introducing a sea change in leadership. The seasonal selling may not yet be over but reacting to the near-term confluences of cyclical and economic forces by selling impulsively may prove to be a flawed strategy for longer-term investors, especially given the long-standing durability and elasticity of this bull market.
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