October has a bad reputation on Wall Street as the month that saw the 1929 and 1987 crashes, but September is actually the year's worse month on average for stocks. The S&P 500 (^GSPC) has averaged a 0.5% loss for the month since 1950, while the Dow Jones Industrial Average (^DJI) and the Nasdaq Composite (^IXIC) have shed 0.8% and 0.6%, respectively. What will happen this September and how should smart investors play things?
Let's check it out:
Why Is September Dangerous?
In my opinion, there are several reasons why stocks historically sink in September.
First, I believe the fact that kids go back to school is a problem. Lots of parents are sending their offspring to college, and many families will pay the tuition bills with parental "profit-taking" after a summer that's been kind to equities investors.
Second, we're getting to the fiscal year's Sept. 30 end for many corporations, mutual funds and the U.S. government. As the money dwindles down, so too does spending -- and there's no guarantee in some cases that new money will show up on Oct. 1.
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Third, September sees is the return of higher trading volumes after Labor Day and summer vacations are behind us. That could mean a return of volatility, as the VIX was hanging in above 12 as the sands of time ran out on August.
And lastly, we have to deal with midterm U.S. elections that are looming for November. The Dow and the Nasdaq historically do even worse in September when we're in a midterm-election year, as we are now. According to the Stock Trader's Almanac, the DJIA falls 1% on average, while the Nasdaq sheds 0.8%. (The S&P 500 does a little better than usual, but still averages a 0.4% loss.)
Midterm elections are often contentious, but I'm not sure I've ever seen anything like this. If Congress changes hands, will we see a serious attempt to roll back President Donald Trump's tax cuts and business deregulation even though they appear to have finally gotten the economy moving in the right direction?
Some Good News
Fortunately, Trump's trade disputes with various foreign countries appear to be headed toward potentially favorable outcomes, while U.S. consumer spending is also red hot. The Trump tax cuts are supporting increased savings and discretionary income despite a lack of headline wage growth.
Corporate earnings are likewise strong and expected to remain so going into the third quarter -- not to mention all of the repatriated overseas corporate cash that's slated stock-repurchase programs. Thanks in part to such positives, September 2017 wasn't all that scary, as this S&P 500 chart shows:
Optimism around the Trump tax cuts fired up markets back then, and while the market has largely priced in tax reform by now, the U.S. economy is fundamentally stronger this September than it was a year ago.
Add it all up and I'm not going to bail on this market in September, although I'm going to continue to try to opportunistically lower my net basis on many names in my portfolio. I'll be very active in the options space around my more dangerous positions, and even around some not-so-dangerous ones as well.
Let's look at where my portfolio stands as September gets underway:
I remain enthusiastic on aerospace and defense stocks, and am quite content with my longs on Boeing (BA) - Get Report , Kratos Defense & Securities Solutions (KTOS) - Get Report , Lockheed Martin (LMT) - Get Report and Raytheon (RTN) - Get Report . I'm less in love with Northrop Grumman (NOC) - Get Report , but I still own the shares.
Raytheon is a holding in Jim Cramer's Action Alerts PLUS.
Schlumberger is a holding in Jim Cramer's Action Alerts PLUS.
I'm maintaining my longs in Discovery Communications (DISCA) - Get Report , Planet Fitness (PLNT) - Get Report and Walt Disney Co. (DIS) - Get Report to play off of the "experiential" trend and newfound increases in U.S. discretionary income.
However, I'm less sanguine about restaurant stocks. I took profits in Ruth's Hospitality Group (RUTH) - Get Report , although I remain short puts on McDonald's (MCD) - Get Report in an attempt to capture upside at reduced risk.
Disney is a holding in Jim Cramer's Action Alerts PLUS.
The banks really turned it on in August, and my favorite name here remains JPMorgan Chase (JPM) - Get Report . I'm also maintaining exposure to Citigroup (C) - Get Report and Goldman Sachs (GS) - Get Report . In fact, GS was a nice play for me, as I added to that name at what turned out to be August's lows.
JPMorgan Chase, Citigroup and Goldman Sachs are holdings in Jim Cramer's Action Alerts PLUS.
Honeywell and DowDuPont are holdings in Jim Cramer's Action Alerts PLUS.
What an earnings season the retailers had!
I like (and own) Home Depot (HD) - Get Report , Kohl's (KSS) - Get Report and Walmart (WMT) - Get Report , although I did sell half of my WMT long when the name traded above par ($100) in reaction to earnings.
I also own Macy's (M) - Get Report and Best Buy (BBY) - Get Report , and while I'm still in positive territory on both, I'm not up all that much and might move on if I can sell at good prices. Macy's seems like an underperformer after I saw the earnings numbers that everyone else put, up. Best Buy is getting involved in areas like health and wellness, and I fear the company could lose focus by entering areas it doesn't have expertise in.
Kohl's is a holding in Jim Cramer's Action Alerts PLUS.
Information technology remains the focus for me, and I divide my tech portfolio into three sub-portfolios -- Cloud/Software, Semiconductors/Semiconductor Services and "Other."
Right now, the "Other" segment holds just two stocks, gaming companies Activision Blizzard (ATVI) - Get Report and Ubisoft (UBSFY) . Ubisoft has simply been a home run for me, and I have to thank my colleague Zev Fima of Jim Cramer's Action Alerts Plus club for investors for that one. I wouldn't have found it without him. ATVI is also up, but has underperformed the broader market.
As for the cloud names, I still very much like Adobe (ADBE) - Get Report , Microsoft (MSFT) - Get Report and Salesforce (CRM) - Get Report . I also believe that Dropbox (DBX) - Get Report was over-punished in the wake of what seemed like a good earnings report. Elsewhere, I took profits in Splunk (SPLK) - Get Report when that stock raised its head above my cost basis.
Here's how Jim Cramer is trading tech.
As for the semis, thank goodness that I added to my stakes in Nvidia (NVDA) - Get Report , Lam Research (LRCX) - Get Report and KLA-Tencor (KLAC) - Get Report while those names were down. LRCX hasn't really done much, but NVDA and to a lesser degree KLAC have really dressed up my book this summer.
And as for hot Advanced Micro Devices (AMD) - Get Report , I covet the stock but haven't chased it. Instead, I've been raising revenue by selling put options -- hoping that at least one of them will turn into a discount equity purchase. So far, no dice.
Elsewhere, I'm long iQiyi (IQ) - Get Report and Verizon (VZ) - Get Report . I don't usually play telecoms, but I see VZ as focusing on the mission at hand instead of pursuing mergers or flashy ads. Verizon also pays me a 4.3% dividend just to own the stock.
At the time of publication, Guilfoyle was long SLB, XOM, HAL, JPM, C, GS, ATVI, UBSFY, ADBE, CRM, MSFT, DBX, NVDA, LRCX, KLAC, HON, BA, KTOS, LMT, NOC, RTN, AMZN, GOOGL, IQ, VZ, HD, KSS, WMT, M, BBY, DIS, DISCA, PLNT, DWDP and GE, as well as long call options on CRM and GE and put options on CRM. He was also short CRM call options and GE put options, as well as short JPM, ADBE, CRM, DBX, NVDA, AMD, MCD, DIS, LULU. However, positions may change at any time.