I'm gonna bring you the results from lulu as soon
as we get them in the after hours. But
for now I do want to turn back to the
major indexes as we start the month of september joining
me now is SAm Stovall, chief investment strategist at
the independent investment research firm at c f r a
Research. SaM, it's great to have you on
as we start a new month. I know september
a historically lower month. What does history tell us
about what might be in store during the month of
september? Well, kristen good to talk to you
again. Yes, september is only the second month
of the year to post an average decline along with
february and in terms of frequency of advance, it's
the only one to decline more frequently than it has
risen. Volatility has been relatively high. This,
uh, usually in September and this year, uh
, if we are continue at the same pace,
will probably end up with um being the third most
volatile year since 1945. Behind 2008 and 2002,
Wow. As to 2008, of course, the
financial crisis in 2002, I'm sure the unwinding of
the.com bubble, is that the case? Yes.
So you could almost, at first glance, you'd
probably think, Oh, that's not good news,
but when you think about it, 2002 was the
end of that bear market and also the latter part
of 2008, most individual stocks bottom then and had
a successful retest in March of 09. So one
could say that because of this elevated volatility, we
are closer to the end than the beginning. I
think a lot of people would agree aside of relief
Sam if that is the case, especially those near
retirement age, anyone trying to save for a home
or simply increase their own portfolio in the wake of
sky high inflation still at its highest pace roughly in
about 40 years or so. We do see the
market any mix today. What else investors need to
know as we approach another Fed decision come mid to
late September? Well, I think investors need to
realize that the market is going to remain very volatile
. The trend is not our friend currently uh and
will probably be that way until we get the employment
data tomorrow. The C. P. I.
Data in the next week or so. And then
the Fed meeting itself. So an awful lot of
reasons for investors to be worried. Um but our
belief is that while we're challenging the june 16th low
, there's still a likelihood that that low will remain
the low for this bear market. Um So investors
just need to make sure that their emotions don't become
their portfolios worst enemy. Yes. Okay. Very
good point. Keep the emotions in check as we
start the month of september, but it sounds like
sam as you were mentioning there. You don't think
that will retest the mid june lows. Why is
that? Well, I think we could retest but
I don't think that we're gonna break below it.
One indicator is that if we end up recovering 50%
of a bear market decline while we might go down
and retest the low, we don't go on to
set a lower low. And that has been the
case every time going back to World War two,
that's history. It's not a guarantee. But it
certainly can be encouraging that it's happened many times before
and might happen again this time. I think it's
also important to note that the Fed I mean is
making it loud and clear SAm it would seem that
we are going to get another three quarters of a
percentage point rate rise. Come this september 21st Fed
decision Of course it's data dependent of course we have
a very important jobs report out tomorrow. More inflation
data ahead that will go into shaping its decision.
But the Fed chair himself on friday Fed president of
new york, john Williams on Tuesday Loretta Mester yesterday
, Fed president of Cleveland. It seems like they
are trying to prepare the market for another 75 basis
point rate rise. What would history tell us about
the Fed speech and whether or not that in and
of itself that decision could be a volatile one.
Come september 21st Well certainly the Fed is priming the
pump if you will letting investors know that there is
a very good likelihood that they will raise by 75
basis points. Um, and I think investors then
have to realize that they might not be done just
yet. However, we still anticipate that inflation will
be moderating and that come December of this year,
the year on year change in CPI I will be
at 5.9% And then 2.5% by December of 2023.
So our feeling is that the trajectory is definitely lower
and if we end up getting even more favorable CPI
readings that I think that could add encouragement to investors
. Okay, any history Sam that you can share
about Again, a lot of people would have seen
inflation across all different sectors digging deeper and deeper in
savings just to get by the highest inflation, the
quickest pace that we've seen in 40 years. What
would history tell us about how long it's gonna take
to cool inflation back down to the Fed's long term
target of 2%. Well inflation. Um, going
back to World War Two, whenever we have had
the year on year change of headline CPI I exceed
6.5% and remember we got up to 9.1% recently,
whenever it was above 6.5% we fell into both a
bear market and the recession, the recessions ended up
lasting an average of 10 months. Uh, and
also, you know, if this ends up being
like the 19 seventies all over again, compound annual
growth rate will only be about 1.5% as it was
back then. So that could certainly be a challenge
. And whether it's utilities, whether it's gasoline,
whether it's food, clothing, etcetera, uh Certainly
the average american will have to tighten their belt uh
in order to make ends meet Any winning and losing
sectors. Sam that your data would tell us might
be ahead. Of course, we continue to see
the ten-year Treasury yield now climb above 3.2% at the
two year yield today at its highest level since 2007
. Right on the cusp of the start of the
financial crisis. What is your data show about sectors
that could do well in sectors that might be underperforming
ahead. Well, if the inflation picture continues,
if the concern about higher rates uh progresses, then
we're basically seeing the strength that will likely continue,
meaning that the inflation hedges like energy and materials will
be out performers. And the defensive areas like consumer
staples and health. I mean utilities will end up
being performers. Whereas the growth high valuation groups like
communication services, consumer discretionary and technology will continue to
be under performers. So it really depends on how
long this inflation and you know, pressure on the
high P. E. Groups will last. Another
question um that I have for you SAm is come
the end of the year. We know sometimes there
always is a bit of window dressing. I think
people pretty much caught flat footed at the start of
this year thinking that after the first two trading days
of record highs, we would not be in the
position that we're in now. We would probably be
at new record highs. But instead we did see
pretty intense selling And so as investors try to plan
for the rest of this year and the beginning of
next year positioning their portfolio of course trying to be
savvy when it comes to taxes. What might you
suggest they do? Well, I think right now
if you have an awful lot of red ink,
what you can do is is take those losses and
simply flip them into if they happen to be in
companies or in E. T. F. You
can take do some tax loss harvesting meaning let's say
you have an S. And P. Five 100
E. T. F. Well you can sell
one at the loss and then at the same day
by back into another one. And then that way
you you haven't changed your exposure to the market but
you are able to capture that short term or long
term loss. So that's one thing history did warn
us that we could end up having a challenging year
because we were up by more than 20% last year
and any time that happened the year following ended up
declining an average of 11%. So history does give
us some encouragement that whenever we've come to the end
of the midterm election year from october 31st of the
year, like this one to the october 31st of
the third, Third year of a president's term in
office. The market has never declined on a total
return basis and has risen an average of 21%.
So should history repeat? There's no guarantee it will
. History basically says be prepared for a good run
from October to October. Of course, the midterms
a factor in this as well. Sam my final
question to you is, how do the midterm elections
factor into this bigger picture? Well, originally,
what you find is that the first year of a
democratic president ends up losing 26 seats in the house
and four seats in the Senate, which would just
automatically switch control to the Republicans. However, because
of many issues that have been raised, uh,
causing the Democrats to come out or likely to come
out in numbers now, it seems as if there
is a good possibility that the Democrats will retain control
in the Senate, but the republicans possibly take control
of the House. And history says a split.
Congress usually does best for the market because if nothing
, in a sense comes out of Washington to serve
as a headwind for equities, then investors breathed a
sigh of relief. Ok, Sam Stovall joining us
on the first official training day of september SAM,
Thank you as always, SAM's the chief investment strategist
at CFR I Research.