Discover more from Cedar Grove Capital Management
Buy the Dip
Stocks got rocked this month but that shouldn't scare you
September has been historically ROUGH
The S&P 500 is up 18% year to date, after gaining more than 16% in 2020 and 29% the year before that, however, the stock market usually performs poorly in September.
September is usually one of the worst months of the year for the stock market, but shares do better at times when they have already done well. Over the years dating back to 1928, the average September return for the S&P 500 has been a loss of 0.99%. That makes the month far worse than May, which ranks second in providing gloom for investors with an average loss of 0.11%
The picture is even darker when it’s the first September in a new presidential term the S&P has seen an average decline of 0.73% since 1945.
Although corporate profits have surged this year, the S&P 500 is still trading at a price-to-earnings ratio that's well above its five and 10-year averages. This could be an indicator for investors that ate itching for the pullback to happen so that they can take advantage of slightly lower prices.
However, it's worth reminding investors that buying and selling based on the month on the calendar isn't necessarily a great idea. For one, it's best to stay fully invested to maximize gains instead of trying to time the market.
Time in market > timing market
Sure, your portfolio may get hit along the way, but most investors — even the pros — find it difficult, if not impossible, to perfectly time market bottoms and tops.
What investors are worried about right now
Inflation also appears to be taking a breather: Consumer price inflation came off its 13-year high in August, according to data released earlier this week.
And while the Delta variant is weighing on job growth, other economic indicators have been doing just fine: Retail sales were better than expected this week, rising rather than falling. Along with the slower increase in prices, these are good signs for consumer spending — which is the backbone of the US economy — and could mean better marks for economic activity in the second half of the year.
"The steep August falloff in consumer sentiment ended in early September, but the small gain still meant that consumers expected the least favorable economic prospects in more than a decade," said Richard Curtin, chief economist at the Surveys of Consumers.
Another stain on the report: Buying attitudes for durable household goods, or big-ticket household items like refrigerators and air conditioners, dropped to its lowest level since 1980.
There are a lot of moving parts, and with so much in wait-and-see mode, Wall Street is rightly worried — but not overly worried.
It's a lot to take in: The recovery is in a strange spot, people are concerned about what the winter might bring in terms of the pandemic and valuations are high in a stock market that doesn't have a decisive driver right now. But experts say the best thing you can do is to keep your money invested.
Debt ceiling risk
“Everybody’s been calling for a correction, and it’s always hard to see what the catalyst could be. The catalysts for a correction right now are as clear as they’ve been all year long,” - Morgan Stanley Investment Management head of global macro strategy Jim Caron
For now, Caron sees the Fed’s communications in the week ahead as less of a risk for markets than other simmering issues, like the debt ceiling, the potential for more taxes and uncertainty surrounding the White House’s infrastructure bill.
Investors continue to watch for earnings warnings ahead of the third-quarter reporting season, which starts in mid-October. The concern is that supply chain risks will continue to crimp revenues and could hurt margins.
There are a few companies reporting in the week ahead, and they should comment on supply chains and rising costs. FedEx reports Tuesday; General Mills releases earnings Wednesday, and both Nike and Costco report Thursday.
It’s not all doom and gloom
September doesn't have to be a tough month for stocks. Even though share prices pulled back sharply last September, the S&P 500 rallied in September 2017, 2018 and 2019.
According to data from Bespoke Investment Group, there have now been 15 winning streaks of seven or more months for the S&P 500 since 1945. History shows that stocks often build on that momentum. Bespoke pointed out that those winning streaks reached an eighth month 10 times, with a median increase for the S&P 500 of 1.6% in the month following a seventh straight gain.
The good news is that following the 14 most recent seven-month winning streaks, the S&P 500 has notched further gains over the next six months 13 times, with an average return of 7.8% during that period.
Cannabis got smoked but presents buying opportunity
Don’t you love when your stocks go down for absolutely no reason? “Yeah!” Said no one ever.
It’s been quite a frustrating month, let alone year, for cannabis investors. Alternative Harvest ETF (MJ), the biggest cannabis ETF, is down 2% MTD and down 54% since its February peak. This ETF contains heavy-hitter names such as Tilray (TLRY), Aurora (ACB), Canopy Growth (CGC), and GrowGeneration (GRWG) to name a few.
I’ve highlighted their September MTD returns, amoung others, below for you to check out.
Needless to say, it’s been tough to hold onto cannabis stocks in the month of September. With the Russell 2000 down 1.6% MTD (I like to benchmark the cannabis industry to the Russell rather than the S&P), cannabis seems to have been collateral damage by a steep margin.
Since I track this on a daily basis, no substantial negative news has taken place in the last few weeks that justifies this intense drop.
Even the vertical farming players, Hydrofarm HYFM 0.00%↑, Agrify AGFY 0.00%↑, and Urban-Gro UGRO 0.00%↑ have had steep declines. In theory, these companies should have lower volatility given the nature of their business (supplying equipment not growing) but because they are still in the high growth phase, they’ve been getting punished.
All of these companies have massive upside potential and for reasons that I highlighted in a recent article, they just haven’t been given the current valuations that they deserve.
With a recent pullback that is this significant, one cannot ignore taking advantage of sizing up a position while they can, especially if you are a long-term investor within this industry.