AS OF LATE
Well, September has come and gone and it definitely outperformed its historical norms. As we stated in last month's newsletter, September is historically known as the worst-performing month of the year, and the unpredictability which accompanies it is very notable. Just as August more than outperform its historical averages, September turned around and did the exact same thing - except in the opposite direction.
September is the middle month of the historically worst 90 days of the calendar year and has averaged being a negative month over long periods of time by approximately one-half of 1%. For September of 2020, it outperformed this negative average by 8 fold. Dropping approximately -4%. Usually, during election years, the losses in the month of September get muted largely and produce minor losses in the -.2% range. Obviously, September’s -.4% result expanded those election year loss averages by 20 fold. When stated that way, it seems rather monstrous and no one likes a -4% monthly loss, September 2020 is notable from an analysis standpoint as being far outside the norms.
Next, we have October, the final month in the annual risk trilogy of the worst ninety days of the calendar year. While some of the single worst days of market history have occurred in October (of the 20 largest single-day losses in U.S. market history, 9 have occurred during October), October only logs a minor loss when average losses for calendar months are analyzed. October will be very interesting. With the next round of stimulus still hanging in the balance, large layoffs are already in play, most notable are American Airlines and United Airlines. Other large layoffs are pending.
As you can see in the graph below, the volatility for 2020 has definitely been in place almost since the year started. Out of the last 9 months, just 3 of these first 9 months have shown negative returns and yet we currently sit with a total gain for all this risk that's been taken for a total gain of simply about 3%. The really crazy part is this, corporate profits are way down from last year and even the year before, so why are stock prices up and why is Wall Street applauding the higher market so much?
The S&P 500 Index compared to the long term government bonds for 2020 year to date is shown below.
Meanwhile, we can also see that long-term US government bonds have maintained their own strength as well as their performance return over stocks for the last 24 months, September 2018 to September 2020.
Typically when anyone is taking on risk in business, they want to be compensated for the risk they take. Otherwise, why would anyone ever be willing to take risks if there was no possible benefit at all to taking that risk?
Think about taking out a mortgage. If people are a higher credit risk they're going to have to pay a higher interest rate to borrow money. If your house is more likely to burn down due to the construction or the condition of it than your neighbors, you're probably going to pay a higher insurance premium than your neighbor does. But with all the risks that we've seen here in 2020, investors really haven't gotten paid for that risk on a buy-and-hold basis. Again, think about a mortgage, that risk is managed by the way they underwrite a potential customer’s credit history, income, other debts, claims history, etc.. Think about insurance, insurance companies manage risk every day every way they possibly can.
Now some of you might say, Well, the risk that COVID-19 could not be foreseen in terms of the time frame or the severity or those types of things". I would freely agree that you're 100% right but the other item and much more calculable item is that markets were under great internal stress before the year even started. Yes, there was a block of stocks that were performing very very well in 2019 and carried the markets higher but there was a much larger host of stocks in 2019 which were not faring well at all, and their problems were being masked by some of their larger counterparts.
As we're currently discussing risk, one of the risks we've mentioned in the last few newsletters is the risk of inflation. We did point out last month that we've been seeing a good bit of inflation in the pricing of housing for the last few years whether you're buying or whether you're renting. We also mentioned that some of the construction components, sometimes used for housing and sometimes used for more commercial type buildings, things like lumber and concrete and steel have been rising at a pretty great clip here as of late.
Now we're seeing some information that brings to light another motivator for inflation. Food costs.
Rising food costs are some of the worst types of inflation. They are extremely penalizing for lower-income persons. Rising food costs have little to no workaround. About the only ways to combat rising food costs for lower-income earners is to either buy less food or buy lower quality foods. Neither of these is particularly beneficial.
When I was in college, one of my best friends worked at night restocking grocery shelves. Once a week the grocery store would have this 1 hour, late-night sales of dented and no label cans. Large boxes just filled with dented cans as well as cans with no labels-you'd simply buy a shiny metal can and hope it was something you liked. The cans were .05 each. I do recall being able to identify a certain brand of peas, label removed, at about 50 yards away. We'd also be able to buy fresh fruit that was not looking too fresh. Bananas which looked like they had been used as hammers. Apples that appeared to have been used for batting practice and bunches of grapes which looked like they had initially started through a wine press. Not great looking stuff, but it was cheap.
We all had some money but there was always a fishing trip to the beach we wanted to take or spring break was coming up or a girl we had some affections for which all seemed more important than spending our cash on food in better condition than we mostly had been raised eating.
In the graph below, you can see starting in April of 2020, food began to inflate at more than twice the rate it has for a long period of time! So, housing costs are rising AND food costs are rising. Two main staples for the survival of most human beings.
Another area of risk seems to be comically very well illustrated in the cartoon below. In the cartoon it seems no matter the places our feet may tread, we could easily step in something better suited to be on our boots rather than our head! Yes, it is once again campaign and election season and much is being said, and also likely, much is being spread. Our only encouragement would be this, VOTE.
So, in summary, we have looked at short term risks for the here and now. Aug, Sept, and October taking us 30 days forward up to election day. We have looked at the ongoing risks already in play, housing costs are running higher, construction costs, and the like. We have also pointed out the longer-term risks, inflation which is begging to brew higher in food costs which can have a greater adversarial effect on low-income earners. All of this is set against a backdrop of corporate earnings we mentioned again which began to fall more than a year ago. So, markets are up, profits are down and these two cannot continue their divergence in the long term.
Please let us know if you are interested in having an online appointment with us rather than doing a face-to-face meeting. We have been doing online meetings with clients long before Covid showed up. We do reviews, updates, or introductory meetings online if you would like for us to.
We remain watchful.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
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