“Summer has come and passed/The innocent never last/Wake me up when September Ends.”- Green Day
With Labor Day officially wrapping up summer Many US markets are trading at, or near, record highs leaving little wiggle room for bad news or disruption of any sort. Historically, September is the weakest seasonal month of the year. But before you start pulling the eject lever on the bull market, take a step back and realize any sell-off we have is likely to be short lived. However, I would be prepared for a -5% to -7% pullback. Seasonality tells us to be ready for a drop. The last 5 years, the S&P 500 has averaged a -4.17% return in September – by far the weakest month on record with it being negative 4 of the last 5 years. Over 10 years, September has returned -1.96% with 6 out of 10 years negative, and over 20 years it’s -0.65%. But if you look ahead at what the winter may bring, November is the strongest month of the year and historically we have rallied out the year. Over the last 20 years, October, November, and December all average positive returns, and November-April is the strongest 6-month period in the year.
We also have other indicators showing the market has further fuel to power the rally higher. According to Bespoke Investment Group, the S&P 500 has rallied 25%+ in 100 days 12 times in the last 70 years. The 3-month forward returns have been positive 12-out-of-12 times with an average return of 6.00%. 6-month forward its up 8.45% on average with positive returns 11-out-of-12, and 1-year forward returns of 12.56% again with 11-out-of 12 periods being positive. We also have a market rally broadening out with small caps outperforming their large cap peers by 400bps+ in August as well as value beating growth. Yes, the Maginficant7, AI, and technology remain crucial to the continued rally, but other stocks participating gives more sustainability to the market rally. But the market is not ONLY technology stocks; in August none of the Mag7 were top 10 performers, with AAPL being the best up 11.84% making it only the 44th best performing S&P 500 stock in August. Beyond individual names, the best sectors in August were healthcare and materials as technology lagged the S&P 500 in general, showing a broader participation in the rally.
There are certainly risks (there always are with investing) including concentration and valuation. Policy error remains a risk, especially with tariffs put back in flux by the recent court rulings as well as the Fed Board potentially changing due to Lisa Cook’s currently contested firing. The S&P 500 is now one of the most concentrated on record with approximately 39.5% of the index concentrated in the top 10 stocks. Its average PE is now 22.5x, well above the historical average of 16.8x (since 2000), and its Price-to-Sales ratio is the highest ever at 3.23x. But we caution that valuation does not historically kill off a bull market – markets can remain irrational far longer than the rational investor feels is possible.