2013 year-to-date performance through September 13th show that stocks have advanced above annual averages by a healthy margin.  Since 1928, the average annual return for stocks has been 11.28% not including dividends.  5 years after the global financial crisis, US stocks continue to appreciate as the economy steadily improves and corporate profits rebound.  Moreover, our markets have been a relatively safe haven compared to the rest of the world, which has also helped attract investment.  This year’s positive performance is broadly reflected in large to small capitalizations as shown below:

12/31/12-9/13/13 index return

Dow Jones Industrial Average:         17.34%

Standard & Poor’s 500                     18.36%

Nasdaq Composite                           23.37%

Standard & Poor’s Small Cap            24.90%

Data from Barron’s 9/16/13

Despite the good news, historically September has the reputation for having the worst monthly performance with returns averaging -1%.  Will markets give back some of their advance this year?

Bad News Bears – or plenty to angst about

When markets seem to be behaving well, I worry about an “exogenous” shock (something unpleasant coming from the outside.) In the legislative world, there is plenty to cause fret.  Washington squabbles over:

  • The debt ceiling and a looming potential government shutdown if the government is not funded
  • An ongoing lack of a formal budget causing arguments over the next continuing resolution to fund the government operations.  Remember, the fiscal year ends September 30th.
  • Syria, what to do?
  • Announcement of a new Federal Reserve Chairman nominee (Look for markets to react depending on whether the candidate is seen as extending or curtailing the level of bond buying, which could cause interest rates to spike further.)

Happy Face – plenty to cheer

On the good side, the economy is improving, company earnings have been better than expected and many of our trading partners are in better shape, too.  Other benefits supporting this market to consider:

  • The recovery, as reflected in the stock market, is showing more “legs” as risker areas of the market outperform.  Small cap stocks have done better this year than large cap stocks.
  • Cyclical stocks, by reason of both valuation and business improvement, are also looking like the next destination for capital.
  • Strategists are talking about an expansion of P/E multiples (price to earnings) which we have not seen in some time.  At the depths of the global financial crisis, P/E ratios almost fell to single digits from a normal average of 14 (where they are now).
  • Stock performance – which is highly correlated in down markets (think everything dropping together) – is starting to show some variety between sectors and individual stocks.   Anecdotally, I am hearing more about individual stock picks. Rather than the simple risk on/risk off trade where investors are either in or out of the market.
  • IPOs are starting to ramp up again.

Despite the potential for volatility…

There are plenty of reasons for a possible pullback – in September or in the months ahead. Many of these reasons, however, come from external factors rather than weakness in the market or companies themselves. Good news – at least in the long term – outweighs the risks in this market.


 

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