Historically, September has been the worst month for investors in the US stock markets. Since 1928, the S&P 500 has averaged a 1% loss in September. The same is true for the Dow Jones Industrial Average, dating back to 1896.
Strategists believe that history will repeat itself this September, perhaps in a more brutal way that may make previous declines seem like child's play.
For investors, knowing how to position yourself for the coming storm is crucial to long-term profitability. While several indications show that the market is poised for another monthly decline this year, it also presents opportunities for those who know where to look.
In this article, we look at how you can stay invested profitably in what is regarded as the worst month to invest in stocks.
It's common knowledge that September is a slippery slope in the stock market.
But this year has more twists and curves, and investors believe that there will be more bloodshed this September due to several triggers. Let's have a look at some of them.
The Federal Reserve is set to keep raising interest rates, with analysts expecting another 75 basis-points from the US central bank.
Traders were betting that the US central bank would ease a little in its inert rate hikes. However, Fed Chair, Jerome Powell punctured any hopes of a soft landing for investors in his Jackson Hole speech.
Powell said Americans should expect more pain in the days ahead as the Fed battles to bring down inflation. These comments were made in the last week of August, setting the stage for a gloomy September for stock investors.
Technicals also show that markets are due for a decline after posting double-digit rallies from their June lows through their August tops.
That rally was driven by signs that the inflation rate was starting to decline a bit, and hopes that the Federal Reserve would slow down the pace of interest-rate hikes.
But now, those bets are unwinding after Powell's hawkish tone during his Jackson Hole speech. Despite starting August strongly, US indexes gave up their gains for the month and finished negative for the fourth straight month.
Since the 1950s, every recession has been preceded by an inverted yield curve. This is when short-dated rates rise above long-dated ones.
It is easy to see why the bond market's yield curve has a mythical hold on investors. In August, the yield curve on the 2-year Treasury Notes spiked to its highest level against the benchmark 10-year Treasury notes since 2000.
Wall Street believes that the Fed could steer the economy into a recession as it increases rates to bring down inflation.
The US currency has crushed every other major currency in the forex market this year.
The dollar's momentum has sent the Euro to a 20-year low, with the European currency falling below parity. It also pummeled the Yen to a 24-year low and is sending the British Pound to its lowest level since 1985.
The strengthening dollar is a concern for investors. US companies that have overseas operations could see their profits decline as their products and services would get more expensive due to the rising dollar.
This would lead to lower earnings and weaker forecasts, which could dampen the already sour mood of investors.
Given its antecedence, plus the macroeconomic realities, it's understandable if investors are on the edge when it comes to investing in the market at this time of the year.
However, just as there are risks, there are also opportunities to make money in the month of September. Here's how:
Cash flow from dividends give you a sort of reprieve from rising costs of living.
The extra cash could come in handy as you battle inflation, and have to spend more for necessities. If you're in for the long haul, the dividends offer an opportunity to compound your investments at a cheap price.
The sell-off in the market has sent the share price of quality dividend stocks lower. Reinvesting your dividends at a good price level means you can profit from share price appreciation, and more dividends (as you increase your holdings) at the same time.
Healthcare is a recurring cost for many Americans, and most people spare no expenses when it comes to taking care of their health.
This means companies that operate in this space will continue to see steady revenue, no matter the economy. As such, investing in healthcare companies is a good move.
Investing in real estate has traditionally been used as a hedge against inflation. It can be a tremendous investment, no matter what the market is doing.
However, in today's changing market, with the housing recession going on, buying physical real estate might not be the best move.
REITs on the other hand, give you a viable option for investing in real estate at a huge discount. Medical REITs are a good place to start given the current economy and housing market.
Even though they seem to be losing steam, energy stocks are by far the best performers in the market this year.
The sector (XLE) is up by 40% so far this year, with stocks like occidental petroleum up by over 100%.
Rising crude oil prices due to the war in Ukraine and global demand have seen oil companies having one of the best years in over a decade. The energy sector is a good place to be, at least in the short term.
Utility companies are income generators no matter the economy.
Demand for services such as electricity, natural gas, and water distribution tends to remain steady, even during a recession. The sector also boasts of dividend aristocrats, which make up for its low share price appreciation.
The combination of predictable profitability and income generation makes utility stocks lower-risk options for investors looking to stay invested in what is the worst month for stocks.
For those that have a long-term horizon, one bad month is insufficient to shake them off course.
In fact, when put in perspective, September may be a good month to go shopping. But you have to be careful, otherwise, you would catch a falling knife.
By simple logic, the best time to buy is when everyone is selling, as that's when you would get good stocks for cheap. But this is better said than done, as most people tend to be swayed by market movements.
Price drops in September can be a long-term buying opportunity for you, but you must first conduct due diligence.
However, buying when the market is being hit by economic headwinds and investor sentiment is low, you should be guided by fundamentals, not speculation.
Wall Street is on edge as it heads into September.
This year is like no other given the economic headwinds which have been rattling investors through 2022. The Fed's hawkish posture, inflation, and the possibility that it would take a recession to see prices finally cool off are casting a cloud of pessimism in the market.
The market seems to be unwinding from its August highs, which could give further momentum to the downside.
For those with a long-term view, a bad September may be one of those months you can take the punches as you roll. For others, it can present buying opportunities.
The key thing is adjusting your portfolio to accommodate the oncoming risks. The sectors outlined above provide a good hedge for your investments against market volatility.
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