It's September; Set Your Expectations Accordingly
Thursday, September 5, 2013
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

Think Twice Before Trading
A study of newsletters found a benefit to trading less.

Using Seasonal Patterns
Calendar cycles can give insight into market direction.

Using Currencies for Diversification
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AAII Discussion Boards
Do you incorporate monthly cycles into your strategy?

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 35.5%, up 2.0 points
  Neutral: 33.2%, down 2.5 points
  Bearish: 31.3%, up 0.6 points

Long-term averages:
  Bullish: 39.0%
  Neutral: 30.5%
  Bearish: 30.5%

Take the AAII Sentiment Survey »

We have now entered what is statistically the worse month of the year for the stock market: September. The S&P 500 has lost 1.12%, on average, in Septembers dating back to 1928, according to Merrill Lynch Wealth Management. September has also been the worst month of the year for the Nasdaq and the Russell 1000 since 1971 and 1979, respectively, according to Jeffrey Hirsch of the Stock Trader's Almanac. In a recent post, Hirsch observed in post-election years going back to 1953 that "September is the third or fourth worst month depending on index." He calculates average post-election year September losses of 0.9% for the Dow Jones industrial average, the S&P 500 and the NASDAQ. The Russell 2000 has lost 1.6% on average in post-election Septembers.

Certainly, there is much to fret about this September. The Federal Reserve may or may not start to taper its bond purchases when it meets on September 17 and 18. Congress has returned back from its summer break ready to engage in a budget and debt ceiling fight. The exact timing of when the country will hit the debt ceiling is uncertain, but it seems doubtful that the politicians will wait until the end of the month to start playing to their base voters and the television cameras. Syria is a wildcard with the Obama administration trying to gain support for a strike. And is if all this isn't enough, the end of the calendar quarter always has the potential to bring corporate profit warnings.

It's easy to see how these potential macro headwinds could cause an investor to reach for aspirin and antacids. But the potential headwinds are not reason enough to shift to all cash. The average September has experienced merely modest declines in stock prices. Certainly once the transaction and potential tax costs from selling existing stock holdings, as well as any missed dividends, are factored into the potential net returns, an investor may find that the average loss September incurs is not large enough to justify the effort of exiting stocks early in the month and then getting back into them at the end of the month.

Then there is the fact that nothing on the wall of worry is particularly new. The potential for a budget and a debt-ceiling fight—and even a temporary government shutdown—is well known and should be somewhat reflected in stock prices. The issue of as to whether the Fed will or won't taper is the subject of ongoing debate, though the consensus seems to expect some type of tightening or at least a clearer sign that the bond purchases are going to be slowed within the next few months. Syria is admittedly a wildcard, but everyone knows it is.

Granted, you could make a guess as to what is going to happen, but then you should ask what you know that other market participants don't. Mutual fund managers, hedge fund managers and trading firms all have access to economists, political analysts and detailed research. When it comes to gathering information for the basis of making an educated guess, the advantage is clearly with them. It doesn't mean they are right—often they are very wrong—but a bit of humility when trying to forecast events with uncertain outcomes always serves an individual investor well.

Plus, it's always important to look past the short term. You will need your portfolio for many years, and hopefully many decades. In the grand scheme of things, the fluctuation of one month doesn't matter much. Though it's human nature to feel the pain of a short-term loss, the real risks to a portfolio are inflation and longevity risk (the risk of outliving one's money). This is why I suggest bracing yourself for disappointing performance in September, but not acting on fear or concern over outcomes that are uncertain.

Besides, if you put any emphasis on long-term calendar trends, you should be encouraged that we're now just two months away from the start of the best six-month period for stocks.

More on

The Week Ahead

The only S&P 500 member scheduled to report earnings next week will be The Kroger Co. (KR), on Thursday.

The economic calendar is pretty light as well. August import and export price data will be released on Thursday. Friday will feature the August Producer Price Index (PPI), August retail sales, the preliminary September University of Michigan consumer confidence index and July business inventories.

The Treasury Department will auction $31 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year notes on Thursday.

AAII Sentiment Survey

Bullish and bearish sentiment rise as neutral sentiment fell in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose by 2.0 percentage points to 35.5%. Even with the rise, optimism is below its historical average of 39.0% for the fifth time in six weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged, dropped by about 2.5 percentage points to 33.2%. This is the 20th time in 24 weeks that neutral sentiment is above its historical average of 30.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, increased by about half a percentage point to 31.3%. This marks three straight weeks of bearish sentiment being above its historical average of 30.5%.

Investors seem to be either increasingly bullish or increasingly bearish and the sentiment survey reflects that. Bullish investors look to our dropping unemployment rate and positive numbers from Europe and see a market pullback as healthy while bearish investors are worried about the Syrian crisis and emerging market weakness. The sentiment survey has been volatile in recently weeks and I fully expect that trend to continue especially with the upcoming debt ceiling debates, potential tapering in Fed bond-buying and impending Congressional deliberation on using U.S. military assets in Syria.

This week's special question asked AAII members how the conflict in Syria is affecting their six-month outlook for stocks. More than half (52%) respondents said the conflict wasn't impacting or was having little impact on their short-term outlook. Nearly three out of 10 (27%) respondents said the conflict was causing them to be more negative. Several respondents said any impact on the market caused by a U.S. strike would only temporarily hurt stock prices, while others said their opinion may change depending on how future events play out. A few respondents thought a military strike could create a buying opportunity in the U.S. markets.

Here is a sampling of the responses:

  • “It does not affect my outlook for U.S. stock prices.”
  • “There may be some intermediate, short-term negative volatility, but two-to-six months from now it will be business as usual in the stock market.”
  • “If the conflict escalates, then there will be a significant negative impact on U.S. stocks.”
  • “Not at all as things stand now; there is too little to go on.”

» Take the sentiment survey

AAII Asset Allocation Survey

Cash holdings rose among individual investors last month, according to the August AAII Asset Allocation survey. Equity holdings declined, while fixed income allocations were essentially unchanged.

Stock and stock fund allocations declined by 2.9 percentage points to 62.3%. This reversed last month's increase, but kept equity allocations within the range that has held throughout most of this year. August was the fifth consecutive month and the seventh out of the past eight months with stock and stock fund allocations above their historical average of 60%.

Bond and bond fund allocations increased 0.1 percentage points to 17.2%. August was the third consecutive month with fixed-income allocations coming in at either 17.1% or 17.2%. August was also the 50th consecutive month with bond and bond fund allocations above their historical average of 16%.

Cash allocations rebounded by 2.8 percentage points to 20.5%. August was just the third month in the last eight months with a cash allocation reading above 20%. August was also the 21st consecutive month with cash allocations below their historical average of 24%.

Fixed-income allocations seem to be holding a new lower, albeit still above average, range. Some of the money appears to be moving into cash as can be seen by the second reading above 20% in three months. Equity allocations, conversely, are mostly fluctuating within a four percentage-point range.

The numbers are indicative of the ongoing uncertainty facing individual investors. Current stock valuations, uncertainty about when the Federal Reserve will begin tapering its bond purchases and frustration with a lack of key progress by Congress and the president are all influencing AAII members' sentiment towards stocks and bonds. Many of AAII members take a long-term approach towards their portfolio allocations and although there are small changes, nothing has occurred to prompt the majority of survey respondents to make significant changes with their allocations.

Last month’s special question asked AAII members what changes they made, if any, in response to the S&P 500’s 18% rise during the first seven months of 2013. One out of four respondents (26%) said they haven’t made any changes. Approximately 16% of respondents said they raised cash, while 14% said they increased their equity allocations. Bond allocations were reduced by 11%.

Here is a sampling of the responses:

  • “I have taken some profits on bond funds and held cash for a market dip in dividend paying stocks.”
  • “The only real change has been to sell stocks I felt were extremely high and purchase others I thought were rather low.”
  • “I moved to shorten my duration on investment grade bonds.”
  • “I moved a significant amount of my portfolio into cash.”
  • “I’ve been slowly increasing cash. Long term, I’m still positive on equities, but I’m waiting for a better entry point.”
  • “much no change; bond expirations have been boosting my cash balance.”

Wishing you prosperity and, to our Jewish members, a good new year,

Charles Rotblut, CFA
AAII Journal Editor

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