ClockWise: Septem-bear is upon us

Following on from a fourth consecutive month of positive returns for global equities, markets began September in a much more negative manner.

Equity markets suffered their worst week of gains since September 2022, as worries about the US technology sector and an economic slowdown weighed on investor sentiment.

A stock market sell-off in September is not unusual. Historically, we note that it is the worst month of the year for stock markets (Chart 1). Dating back to 1986, the data shows that the average excess return of equity markets over cash in September is -1.9%, compared with a +0.7% monthly average excess return for the rest of the year. This phenomenon has persisted recently too; over the last five years, equity markets have underperformed cash on average by -3.5% in September.

Chart 1: Average monthly excess returns of global equities over cash

Source: LSEG Datastream. Returns of stocks vs cash from 1986 to 2023. Datastream World Equity Index (Total Return) used to show stock returns, JP Morgan Global Cash 3M Index (Total Return) used to show cash returns.

The seasonal summer weakness that equity markets typically experience is even more extreme when compared to the returns offered by bond markets, which tend to sharply outperform stocks in this period (Chart 2).

Chart 2: Average historical seasonal return of stocks vs bonds

Source: LSEG Datastream. Returns of stocks vs bonds from 1986 to 2023. Datastream World Equity Index (Total Return) used to show stock returns, UK 10Y Government Bond Index (Total Return) used to show bond returns.

We saw a positive environment for stocks in August as a sharp bout of volatility left equity markets at cheap levels and our measure of investor sentiment became overly pessimistic. We went into September with a slightly less optimistic view, compared to a few weeks earlier, as investor sentiment had moved back to neutral levels and equity markets entered the month close to all-time highs. The recent slowdown we have seen in global growth data also supports a less positive view on equities in the near term. This phase of the business cycle where growth is slowing alongside falling inflation, bonds typically do well, as central banks move to cut interest rates.

We see a neutral environment on equities for now but would likely become more positive should an improvement in the technical or macro backdrop occur as we move toward year end.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.