Time is your friend; impulse is your enemy. – John Bogle
Someone forgot to tell investors that the month of September has historically been one of the poorest months for the stock market. All of the talk that the market was long overdue for a correction fell on deaf ears as the Dow Jones Industrial Average rose 2.1% during the month, compared to an average monthly loss of 1.1% over the past 100 years. The S&P 500 Index and the Nasdaq Composite Index also performed well last week, closing at new record highs. It was the least volatile September on record as the average daily range of the S&P 500 was less than a half of a percent. With economic data last week decidedly mixed and third quarter earnings season beginning this week, the most likely reasons for the market’s strength were comments made by Federal Reserve Chair Janet Yellen and the prospects for tax reform and tax cuts. In a speech to the National Association for Business Economics, Yellen acknowledged that the Fed may have overstated the strength of the labor market and the rate of inflation. This confession could lead to easier monetary policy in the future and an even more dovish Federal Reserve. The only downside with this thinking is that by keeping interest rates lower for longer, it does not allow any room for stimulus when another economic slowdown occurs. The other positive development for the stock market last week came in the form of the much-anticipated tax plan that has been part of the Trump administration’s pro-growth economic agenda. The plan is merely an outline and now must be reviewed and dissected by members of Congress and voted on before it eventually becomes law. In its initial form, the plan calls for reducing the number of individual tax brackets to only three – 12%, 25% and 35% and cutting the corporate tax rate from 35% to 20%. It also proposes to double the standard deduction and eliminate the estate tax, the alternative minimum tax and deductions for state and local taxes. While investors are optimistic about the positive effects that such tax reform might have on economic growth, there is a long way to go before this plan becomes reality, as proponents of replacing the Affordable Care Act have discovered.
Economic data released last week was both positive and negative. On the positive side, the final reading of second quarter GDP was 3.1%, slightly better than the expected reading of 3.0%. U.S. durable goods orders in August were also better than expected and signaled underlying strength in the economy. The Chicago Purchasing Manager’s Index (PMI) exceeded expectations and showed that manufacturing continues to improve. On the negative side, new home sales in August fell to an 8-month low as home builders are still having difficulty attracting enough workers since the housing crisis. The Michigan consumer sentiment index also slipped in September, although confidence remains high as labor market conditions are still strong. U.S. consumer spending was very soft in August due to the effects of Hurricane Harvey but should rebound in coming months. The personal consumption expenditures (PCE) index, the Fed’s preferred inflation measure, edged up slightly and has risen only 1.3% in the 12 months through August.
For the week, the Dow Jones Industrial Average rose 0.25% to close at 22,405 while the S&P 500 Index climbed 0.7% to close at 2,519. The Nasdaq Composite Index jumped 1.1% to close at 6,495.
The most important piece of economic data this week will come on Friday when the government releases the employment report for September. Expectations are for an increase in nonfarm payrolls of 75,000 and for the unemployment rate to remain at 4.4%. August construction and factory orders are forecast to post small increases after declining in July. The ISM manufacturing and non-manufacturing indexes for September are also scheduled to be released.
Third quarter earnings season begins this week and the most notable companies scheduled to report include Pepsico, Yum Brands, Monsanto, Costco Wholesale, Lennar, Paychex and Constellation Brands.
As the month of September began, many so-called investment experts and strategists, including Jim Rogers, Robert Shiller, Jeff Gundlach and Carl Icahn, warned investors about the stock market’s lofty valuation and the possibility of a correction. After all, September has historically been one of the poorest months for performance and the market has not had as much as a 5% pullback in over a year. Despite worries over North Korea, devastating hurricanes, slowing economic growth, rising interest rates and lower corporate earnings, the stock market has continued to defy the experts and proceeded to set an all-time high. In the face of these ongoing concerns, the market has climbed a wall of worry by rallying even though the news would suggest that just the opposite should happen. The time to really worry is when there is irrational exuberance, which is the sure sign of a bubble in equity prices. Even when things appear bleak and the outlook for stocks is not promising, the key is to diversify and to stay invested with an investment objective and an asset allocation plan that fits your risk tolerance and time horizon. In March 2009 when the stock market hit rock bottom during the Great Recession and the financial crisis, diversified investors merely shrugged and said there was nothing that they could do now so they stayed invested. Those that sold their stocks locked in their losses and failed to participate in the subsequent rally that took the S&P 500 Index from 666 back then to 2,519 on Friday. As John Bogle, the founder of the Vanguard Group, has said, during times of crises or when the news is negative, the best thing to do is to do nothing. Stocks have easily outperformed both bonds and money market funds over time and achieving these above-average equity returns is not about market timing but time in the market. John Bogle could not have summarized this better when he said that “time is your friend; impulse is your enemy”.