NEW YORK — Wall Street professionals know to keep their expectations in check in September, historically the worst month of the year for stocks. As summertime draws to a close, money managers are getting back to business, cleaning house, and often sending the market lower in the process.
September has opened strong eight of the past nine years, but it has ended with a knockout punch for stocks for the past five, partly because institutional traders are making end-of-the-quarter portfolio changes. But some analysts, noting the market’s unusual sell-off this July, question whether the pattern will hold true this year.
“The normal election-year pattern shows the market rallying in July and most of August, then selling off, so we’ve been much weaker than normal,” said Tim Hayes, global stock strategist at Ned Davis Research in Venice, Fla. “The market may have already had that pre-election sell-off.”
During seven of the past 10 presidential races, the major indexes posted gains for September, according to the Stock Trader’s Almanac. The month ended in a loss three times — in 1972 and 1984, when incumbents ran and won, and in 2000, when there was no incumbent.
Part of what drives September’s typical weakness is the difficulty of assessing the outlook for third-quarter earnings after the summer doldrums. It’s almost as if earnings for the entire 12-week period depend on this month, Tobias Levkovich, chief U.S. equity strategist at Citigroup’s Smith Barney division, wrote in a recent note to clients.
When Labor Day falls deeper in the month, like this year, things can get even more complicated.
“We suspect that there will be a fair amount of nervousness about earnings this quarter, especially if the August employment numbers … are less than exciting,” Mr. Levkovich told investors.
The much-awaited data released by the Labor Department Friday offered some promise after two months of anemic job growth, but it wasn’t enough to electrify the market. Employers added 144,000 jobs last month, just short of the 150,000 that economists were anticipating.
Although no one can predict which sectors will perform best in a month like this, history does offer some guidance about which areas are most vulnerable to seasonal weaknesses. On average, telecommunications, utilities and health care have posted gains, while consumer staples, materials, industrials, information technology and consumer discretionaries have shown weaker performances, Mr. Levkovich found.
Among industries, pharmaceuticals and biotechnology traditionally have enjoyed an edge, reflecting the flight to safety characteristic of most Septembers. That might be less likely this year because of uncertainty about how drug stocks will perform if Sen. John Kerry, Massachusetts Democrat, wins the presidential election. Mr. Kerry’s campaign platform includes several measures that would sharply reduce the cost of prescription medications, which could dent profits at pharmaceutical companies. Those fears already may be priced into drug stocks, however.
Investors have been preoccupied with a long list of worries this summer, not the least of them being that the Olympics in Athens or the two political conventions could become targets for terrorism. Although there is still some nervousness about the upcoming anniversary of the September 11, 2001, terror attacks, the market is showing signs of shaking off this fear factor.
Other concerns that loomed large midway through the summer also seem less threatening now. Although the global oil supply is still tight, the market seems to be slowly pricing in higher fuel prices, and reacting with less fright to fluctuations in crude prices.
Anxiety over inflation — and the Federal Reserve’s strategy to curb it by tightening rates — also seems to have subsided. At the Federal Open Market Committee’s next meeting on Sept. 21 — its last before the presidential election — the policy-making group is expected to raise its target for the federal-funds rate by another 25 basis points to 1.75 percent, which is still low by historical standards.
Simultaneously, the dollar is strengthening and corporate earnings are slowly on the rise. This comes against the backdrop of an eight-month tug of war between the bulls and bears as the market digested the huge gains of 2003. It may be a sign that the market’s underlying fundamentals finally are catching up, said Art Nunes, portfolio manager of the IMS Strategic Allocation Fund in Bellevue, Wash.
“Things are kind of converging on the month of September, such that the odds of having a higher market are very high, extremely high,” Mr. Nunes said.
“In the last few weeks, demand has been getting stronger and stronger, more stocks are reversing downtrends and starting to head back up, and trading volume is starting to pick up. I see demand coming back into this market.”