Insights & Advice

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Some brokers are getting bearish

For four days in a row, the markets closed down. That is in itself unusual. It has only happened four other times since the March 2020 low. Does this portend further downside in September 2021?

On Friday, the markets bounced back. The damage to the averages has been minimal thus far. But given how far we have come, more and more brokerage houses (Goldman Sachs, Deutsche Bank, and Morgan Stanley, among others) are warning that the September-through-October 2021 time frame could see a 10% correction. How much weight should you give these gloomy predictions?

If you are a short-term day, or swing trader, heed their call, since we are probably overdue for such a downdraft. This has been one of the 15th longest stretches in market history where the S&P 500 Index has gone without even a 5% correction. Consider that the average time between 5% corrections since 1950 has been only 97 days. As of Friday, September 10, 2021, we are pushing 316 days without such a decline.

As I have pointed out in the past, there are plenty of issues that investors are facing over the next two months. Any one of which could justify some profit-taking. We have the looming battle over the debt ceiling, and the beginning of the Fed’s announced tapering of bond purchases to name just two.

On Thursday, the European Central Bank (ECB) gave us a taste of what that might look like. Christine Legarde, President of the ECB, announced their own tapering of bond purchases under its pandemic emergency purchase program. The Governing Council kept interest rates the same, but noted that inflation was running at a 3% rate in August 2021, the highest in a decade. Markets in Europe took it well, but closed mixed, while U.S. markets fell on the news.

Other investor concerns center on the potential slowing of the U.S. economy during this third quarter, as well as the probability that corporations have already hit peak earnings for this cycle.

Of course, the pandemic is still with us and continues to cause dislocations. Supply chain issues, which were thought to be temporary, seem to be lengthening in durations in areas such as semi-conductors and consumer durable goods and parts. And economists are still arguing over what is transitory inflation and the other stickier kind. The U.S. Producer Price Index rose 0.7% in August bringing the year over year increase to 8.3%, the largest on record.

Now, none of the above information is new. It has been with us for quite some time, but it’s that time of the year when investors, for some reason, start to focus on what could go wrong (rather than go right). Call it behavioral science, investor psychology, or simply “cup half empty.” If this September/October turns out to be down months, then I am pretty sure that November through the end of the year will be up months for stocks. That is the rhythm of the markets.

The moral of this tale is that if you are a long-term investor, the next two months are simply a tiny blip, or bump in the road that should be ignored. If you attempt to sell everything and then buy at the lows, you haven’t learned anything from reading my columns. The best advice I can give is to ride it out, and if markets drop, just don’t look at your portfolio (if you are the nervous type).

Another possibility is that we have a shallower pullback than the pundits are predicting, or none at all. Who says they have it right?  As I wrote last week, history has been a poor guide in predicting the future of markets undergoing extraordinary circumstances.

As regular readers know, my target for the S&P 500 Index in the intermediate term was 4,550.  On September 2, 2021, we hit an intraday high of 4,545.85, which is close enough for government work.

Right now, I see some downside, possibly to 4,448 on the S&P 500 Index, and then I will reassess. Make no mistake, I expect the markets to be volatile in both directions over the next few weeks.  If we do see that 5-10% correction, I believe it will happen over the next two months, rather than a few days.

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