The History of September
The markets have finished strong for the month of August. However, September is historically a poor month for equities. Actually, since the Dow Jones Industrial was created in the late 1800s, it has fallen, on average, 1% in September. The Dow has shown gains in all other months and was up an average of 0.7%. In presidential election years, the market during the month of September has risen while in non-election years, September is volatile. Obviously, as always, there are no guarantees that this year will be a repeat of the past, but history says that the market strength that we’re seeing could potentially continue into September. This is simply based on the historical performance of September in election years.
Technical Analysis
Historically, we’ve seen strength in an election year but let’s also look at it from a technical analysis standpoint. We have broken the former resistance level of 3,300 in the S&P 500 Index. We’ve held there since August 6th and now we’re looking at a new resistance level of 3,550. There are 3 tactical risks that we’re looking at which are seasonality, sentiment, and stretch. Seasonality falls under it being an election year. Historical data has shown that election years have been good, but we want to keep a close eye on that. From a sentiment standpoint, we’re looking at the consumer and we saw consumer confidence fall last month. We’re going to make sure that trend is being closely watched. Stretch is the 11 sectors in the market that we watch for underlying securities and equities. When we give these technical indicators, it’s to let our clients understand what the trading range is that we see in the markets and at the same time, understand that there’s technical analysis and fundamental analysis. With fundamentals, we’re looking at earnings, the economy, and certain events that are occurring. With technical analysis, we’re looking at the price movements and swings that occur in the individual stocks, as well as the indices that we follow.
State and Local Government
We’ve mentioned state and local governments a little bit earlier in the year on this vlog, but now it’s getting important to watch the data on it because as we know, most of the government’s financial year ends in September. A lot of these state and local governments have been able to sort of drift through the first part of the Coronavirus on prior year budgets. Now it is coming down to roost because 18.6% of employment in the United States is federal, state, and local government with state and local being the majority of that. When we hit the end of September, that’s going to be the first day of reckoning for a lot of these state and local governments because they will actually get to re-adopt a budget that is truly COVID impacted. They’re either going to have to raise revenues by taxes or cut expenses. Moody Analytics said that about $500 billion worth of shortfall across state and local governments could occur in combination, over the next two years. That’s around a 3% total GDP drag over the next two years.
Funny Math
A lot of states get a large amount of revenue every year on Tax Day. Normally, you see a large inflow of income tax revenue on that April filing date. This year, that filling was moved to July so there is less time between the July payment and the September end of the fiscal year. Also, it looks like there’s a huge drop in state revenue for the month of April. That’s partly because of Coronavirus, but largely because people didn’t have to pay their taxes in April and so that got delayed into July. There’s a little bit of funny math there, where a lot of states are pointing to a huge drop but they’re not necessarily being honest because a lot of that drop was made up for in July. In the state of Alabama, year over year sales tax revenue is actually up. A lot of states aren’t necessarily in as bad of a position as It looked like in the depths of the Coronavirus because they’ve kind of made a lot of that up with the July payments. Also, with some sales tax revenue as individuals have started spending, it played a little bit of catch up as well.
Supply and Demand
What will drive us through that resistance level of 3,550 that was previously talked about? A lot of that in the market is a supply and demand indicator. If there’s more demand for stocks and their supply, then prices will go up. One of the largest drivers of demand over the last few years has been companies buying back their own stock and that hasn’t occurred this year. In the second quarter of this year, we saw company buybacks drop 56% compared to the first quarter and 46% compared to this the second quarter of the previous year which is a huge drop in demand. What’s going to make up for that drop in demand? So far we’ve seen the Fed come to the rescue and put a lot of liquidity in the market, but the Federal Reserve is kind of done with what they’re planning to do. Where’s the next leg going to come from? It looks like it could come from the individual. Consumers have been saving money through the pandemic. The savings rates are up to 17%, which is above historical norms. The money on the sidelines and in money markets hit an all-time high of nearly $4.8 trillion in May. That’s come down a little bit by about $250 billion, but there’s still nearly $4.5 trillion in cash and money markets that can be used to spend and to invest. That’s what drives the stock market and the economy. When wages go up, savings go up, and people are confident, it turns into an investment and that pushes prices higher to sustainable levels. When we’re looking at those support and resistance levels, what’s the next leg? Hopefully, we’ll get some consumer confidence and people will take some of this money that is sitting on the sideline and fill that hole that the companies aren’t able to fill. There’s a lot of uncertainty and anxiety, as people are trying to see how COVID-19 along with the election and other economic conditions are going to pan out.
Greg Powell, CIMA®
President and CEO
Wealth Consultant
Email Greg Powell here
Bobby Norman, CFP®, AIF®
Managing Director
Wealth Consultant
Email Bobby Norman here
Ashley Page, JD, MBA
Senior Vice President
Wealth Consultant
Email Ashley Page here
Trey Booth, CFA®, AIF®
Senior Vice President
Wealth Consultant
Email Trey Booth here
Adam Vansant, AIF®
Associate Vice President
Wealth Consultant
Email Adam Vansant here
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
No strategy can ensure success or protect against a loss.
Stock investing involves risk including potential loss of principal.
Securities and advisory services offered through LPL Financial, Member FINRA/SIPC and a registered investment advisor.
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