We are seeing out September with a lift to stock markets around the world after a turbulent month. We recently witnessed the worst one-day stock market sell-off since May, while risk events linger in a whirlwind of volatility, from Chinese property developer Evergrande to a more hawkish US Federal Reserve meeting than many expected.
Major US stock indices charged higher in August, consistently setting new records day after day. Analysts have called it more “climbing the wall of worry” than economic or profit fundamentals.
The market has tended to move north even when faced with a variety of negative factors. Indeed, several well-known acronyms are frequently used to explain this phenomenon such as “BTD” (buy the dip), “Fomo” (fear of missing out) and “Tina” (there is no alternative).
Aside from the threat of new lockdowns and a resurgence in Covid-19 hospitalisations in the US, falling consumer confidence and higher interest rates have darkened sentiment.
The recent emergence and potential collapse of China’s Evergrande Group, the country’s second-largest property developer, with financial liabilities estimated at $300 billion has also cast a shadow over an overpriced market.
The Evergrande story has its roots in the Chinese government’s efforts to rein in excesses in highly leveraged domestic property developers introduced a year ago. But it is the potential size of the default and contagion that might spread to other parts of the financial system around the world that has caused major volatility.
A recent Bloomberg report noted that eight out of 10 of the world’s most-indebted real estate developers are based in China. This sector accounted for nearly 30 per cent of China’s overall economic output.
Numerous market commentators have speculated whether this might be a “Lehman moment”, which propelled the world into the 2008 financial crisis, or at least another Long-Term Capital Management "shock” that spooked global financial markets in late 1998, when the US Federal Reserved intervened after the hedge fund with $126bn in assets almost collapsed. For the time being, the comparisons may be stretched, with Beijing taking it upon itself to find a solution and restructure the company.
But the shock is real and has fed into September living up to its historical precedent as a tough month for investors.
Seasonality is one area of market analysis that focuses the minds of many and is often brought up as we head into the autumn months.
September delivers a decline on average in the S&P500 of 0.56 per cent and the main US stock index has risen just 45 per cent of the time in this month since the Second World War. The figures are even worse in the first September of a new presidential cycle.
The reasons for this are speculative and not especially scientific – dark evenings and post-summer holiday blues are among them. Or, it could just be a statistical oddity as the average is distorted by a few major market sell-offs.
Perhaps on a more positive note, October may be known for famous crashes, but these are outliers as history suggests that most years the autumn shake-out has taken place by then.
What may be significant going forward is the hawkish shift we have seen from the US Federal Reserve at its recent meeting. The central bank is expected to start reducing its bond purchases in November and this may finish sooner than forecast by the middle of 2022.
This more aggressive stance also brought forward possible rate hikes into 2022, with the policy rate of 1.8 per cent in 2024 well ahead of market expectations.
As real rates rise, foreign investors who have flocked to safe-haven Treasuries may be more compelled to move their money elsewhere. This could pressure stocks' price-to-earnings multiples, which are currently well above historic averages.
Investors in certain sectors of the market, such as cyclical stocks and small caps, have realised this risk and these prices have pulled back from their highs. But the tech titans, which dominate performance of the broad S&P500 index, may have some more downside to come if this plays out.
Hussein Sayed is the chief market strategist at Exinity Group