Beware the Witching Season
The months of September and October have historically been among the most difficult of times for the stock market. On average, September has been the weakest of the year. October has been Ground Zero for the biggest market drops of the last 100 years. Yet despite the fact that has been a period of increased volatility, it has often been a time when weakness has been followed by a significant rebound. Even so, let's not jump the gun.
There may be no weakness and there may be no rebound. For the first seven weeks of this year, stocks were on a tear. Then came the pandemic, which led to a national lockdown and devastation among the nation's businesses.
While prices were climbing, so were valuations, almost to a point of excess. Then a new era of volatility showed up, with daily changes in the leading averages often running into triple digits. In the wake of the plunge, market prices did a sharp about-face. The rebound, however, was largely driven by a handful of tech stocks while the broad market lagged far behind.
That rebound continues, despite the likelihood that corporate earnings will be down by more than 25% this year and may not get back up to 2019 levels for two to three years. So current valuations appear to be discounting far ahead.
One reason for high valuations is ultra-low interest rates and the Fed has made it quite clear that it will maintain interest rates at near-zero levels for several years to help the labor market. With more than 10 million people still out of work, that will be a huge challenge.
Although the summer months have provided opportunities to be out and about, the upcoming fall and winter will bring another span of confinement. Let's hope that sometime next year the fruits of intensive medical research may allow us to return to something approaching normal living. A number of vaccines are now in Phase III clinical trials, but there are hurdles to be crossed before we can sound an all-clear.
One hurdle is the combination of efficacy and safety. The next hurdle is production and distribution. To be sure, there are other questions: How long will immunity last? Will booster(s) be needed? Which vaccine is the most effective? And so on.
There is no magic bullet and daily life will not get back to where we were overnight. While waiting, we are all best advised to take the necessary precautions to stay safe and healthy.
Ignoring best practices, gathering in large groups, and making as if the situation has changed is indeed a recipe for disaster.
There is no vaccine for stupidity.
N. Russell Wayne, CFP®