September 26, 2022
Good morning,
In last month’s Monthly Letter, reprinted in these Morning Notes on 9/8, I suggested that the June lows on the S&P 500 Index, then about -7% away from existing levels , would likely be tested. Significant lows (June’s was -24.5% from the January high, which is significant enough), tend to possess a strong magnetic force. A month ago, it seemed like a forgone conclusion that we would get to where we are today – right on top of June’s low (Friday’s intraday low got within 10 pts of it). See the 1yr S&P 500 Chart below.
I think it’s important to mentally prepare for new lows in advance of their development in a bear market. Objectivity is usually hard to come by as lower lows are being registered in the moment. As I suggested in the monthly letter, significantly lower lows from here, while possible, are less likely to hold. In other words, it is perfectly possible that we have some kind of waterfall decline in the days ahead that brings the market down another 5 – 10%, in an emotional blowoff period (known as capitulation) but I don’t think it will be lasting lows. It will, if it happens, likely be followed by rally fueled by record oversold conditions and more attractive valuations.
This month’s decline has come at a familiar time. The period from late August through mid-October is typically the weakest time of the year for the equity market. However, seasonal winds shift through October. November and December are the two strongest months of the year, on average.
When the S&P 500 has been up through September, over the last three months of the year it has risen 83% of the time by a median of +4.7%. When the S&P 500 has been down through September, it has risen only 55% of the times by a median of 2.3%. However, in mid-term years, the 55%/2.3% relationship jumps to 80% of the time by a +5.6% median.
All the above is presented for one reason – to hold on to objectivity when things feel terrible and plan change is being contemplated. If capitulation comes, we will all feel really terrible – forewarned is forearmed.
Be well,
Mike