Mike Conlon
Senior Instructor
instructor@mywealth.com
Historically speaking, the month of September has been the worst month for US stock market performance. This has commonly become known as the “September Effect”. In the same vein as “sell in May, go away” the September Effect has had impact on market psychology and can create a negative bias for market participants.
Under “normal” (non-government intervention) market conditions, the stock market rally that has gone on since March would indicate a strong uptrend in growth yet there is a greater sense of fear that this trend may be fleeting and that a major reversal could occur. While it is apparent that the government economic stimulus plans cannot go on forever, will the market really sell off as some people are predicting?
*****Question of the Week! *****
(Take a shot!!….Chance to Win a FREE Investing 101 Course (VALUE: $99.00!!) by Emailing Us your answer no later than Friday 9AM EST and 3 Names will be randomly picked and named as Winners!! (Must be a blog subscriber) The economy has definitely improved in the last couple of months and although we are not technically out of the current recession, many people feel that we will have a double dip recession. Do you feel that there will be a double dip recession? a) No, because we are not coming out of the current recession b) no, there will be no double dip recession c) yes, there will be a double dip recession
Judging by the chart of the S&P 500 ETF (SPY) below, the trend has been decidedly up since the March lows. That rally has left many investors behind as their fear over the uncertainty of the health of the economy caused them to stay on the sidelines for much of the move upward.
This brings me to the first reason why a stock market sell-off isn’t likely:fund manager performance anxiety. Many managers have missed some of the gains that the market has made and have had to deviate from normal behavior in order to participate. While the fundamentals haven’t been very good, it is still difficult to explain that to your investors in the face of 50% returns. Especially after showing negative returns in 2008. So if a manager hasn’t participated in the rally, or is waiting for a pullback that may never come, he’d better get in now. After all, he is probably toast anyway so why not try to get in and hope to get lucky?
Secondly, the reliability of economic data has changed the landscape for investing, perhaps permanently. The new paradigm of “less bad=good” leaves a lot of room for interpretation. Given the fact that the government needs to show improving numbers in order to keep the economy stable, does anyone doubt the numbers won’t be somewhat positive going forward? Can anyone truly believe these numbers anyway? Barring some major catastrophe in the employment figures, I can’t see anything out there that would take us off course.
Lastly, there just isn’t anywhere else to put your money. Interest rates are ridiculously low and will remain that way until inflation starts to pick up. When that will be is anyone’s guess as this relates to the second point about the believability of government figures. So if the Fed is banking on inflation, you should too. Bonds, money markets, and other fixed income vehicles are out. Stocks and commodities are in.
As you can see, sometimes trying to grasp all of the reasons why a market may be moving can be a fool’s folly. When factors other than actual economic performance affect a market, sometimes it’s just better to jump on board and hope for the best. But be certain to use proven risk management techniques to protect yourself from losses.
You can learn about risk management techniques in our investing and stock market courses.
