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Ready for a Pause?

09/16/2009 1:00 pm EST


Sam Stovall

Chief Investment Strategist, CFRA Research

Sam Stovall, chief investment strategist of Standard & Poor’s, goes through the evidence for weak markets in September and wonders whether this time will be different.

The Standard & Poor’s 500’s price advance continues to confound many investors. The index rose 3.4% during August and [over] 50% since the March 9th bear-market bottom.

While this kind of performance is atypical in August during average years—since 1929, the S&P 500’s price change in August ranked in the bottom half of all months—it has been relatively common following bear market bottoms.

What’s more, nine of ten sectors and 103 (77%) of the industries in the S&P 500 rose in August (27 of them gained more than 10% during the month), pointing to the encouraging breadth of this advance.

However, many investors are wondering if September will live up to its reputation as the month in which the S&P 500 posts its worst price performance and frequency of decline.

In September, it lost 1.3% on average since 1929 versus an average monthly advance of 0.54%.  [But] during the 14 Septembers immediately following the end of bear markets since 1932, instead of posting the average 1.3% decline, the S&P 500 gained a median 2.0%. What’s more, the frequency of declines—at 36% following the end of bear markets—was substantially better than the average 56% for all years.

Unlike August performances following bear market bottoms, however, which saw the S&P 500 rise in 12 of 14 observations, the market’s performance in Septembers following the end of bear markets was less consistent—it posted five declines ranging from 1.2% to 4.8%.

As a result, September’s track record leaves room for disappointment. So, while the average percentage change and frequency of advance results are more encouraging for the S&P 500 during Septembers following bear market bottoms, it is a worthy reminder that history is only a guide.

S&P’s Investment Policy Committee believes the equity markets are due for a period of consolidation. Mark Arbeter, S&P’s chief technical strategist, believes the 500 could decline to the 940-960 level before resuming its advance and establishing a new recovery high.

Also, S&P Economics is looking for US gross domestic product (GDP) to trace out more of a lazy U expansion, rather than a V pattern, over the coming quarters.

Finally, valuations appear a bit steep to us. The S&P 500 is trading at 19x 2009 estimated operating results with five of the ten sectors sporting P/Es of 20x or higher. Financials are the most expensive at 86x 2009 estimates, while materials ranks second at 35x 2009 estimates. We don’t know whether concerns over the upcoming third-quarter earnings reporting season will trigger this anticipated digestion of gains, or if further nervousness emanating from the Chinese stock market over the prospects of a slower-than-expected growth in GDP will cause US equities to trim some of their recent advances, but September  is as good a month as any in which to suffer a setback, in our view.

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