By Carol Buss

Following a negative return for the major indices in August, in September, 2019, the S&P 500 beat the averages of the past 70 years, which was -.59%. This time the Dow was up 1.95%, the S&P 500 was up 1.72% and the Nasdaq was up .46%. However, it was a tale of two halves, and just like many football games, each half can be a very different game. The first half ending on Friday 9/13, was positive, mostly due to an improved outlook for the China trade talks, and the second half was negative, again due to some setbacks in the talks, the Saudi oil fields attack, and the impeachment inquiry of Trump announced the afternoon of September 25th, which all produce more uncertainty.

The averages have been masking the fact that many stocks have been underperforming in the past several years, with many momentum stocks carrying the market averages higher at the expense of value stocks. The notable shift in the market in September was the rotation out of these high-flying momentum shares, which have taken a drubbing. Netflix, Amazon, Ulta, and Mastercard are some examples. At long last value was bought. Investors finally woke up to the fact that some of these names were extremely oversold, given their bright prospects. The confusing part is that some value stocks can also be growth stocks, just not of the momentum variety. Even Apple shares can be considered value.

The market remains hostage to China trade news more than any other headlines. When trade talks sour on a particular day, the market immediately falls. The market reacted positively to the announcement that deputy Chinese/US trade negotiators were to meet on the 19th-20th. However, by Friday, Sept. 20th, the Chinese announced they were not going to visit American farmers in Nebraska and Montana and voila, the market tanks. Even the clarification on the 23rd that the cancellation was at the request of the US did not result in an upward lurch. On the 25th, Trump tweets that the talks are moving along better than people think, and the market gains.

The August handwringing over an immediate recession due to the yield on the 2yr. exceeding the yield on the 10yr. Treasury bond receded in September. That inversion only lasted a few sessions, and isn’t an accurate recession predictor. The economy has definitely slowed from the 2.9% gross domestic product growth in 2018, mostly due to trade uncertainty. However, the US economy continues to be vibrant, fueled by tax cuts, the reduction in costly regulations that is fueling the expansion of small businesses, job creation, and the unleashing of the domestic energy industry, resulting in US energy independence and lower prices for consumers. The economy depends on optimism, not necessarily facts – that is why incessant recession talk is dangerous. Such a recession drumbeat can cause the strong US consumer to believe the recession is imminent, become cautious and cut back, and it becomes a sefl-fulfilling prophesy.

My take is that while there may be wild swings in the market, particularly at this time of the year, there is no evidence that the fourth quarter of 2019 is going to be a repeat of 2018. First, stocks are less expensive on a price/earnings basis from last year at this time. Second, the market during the third quarter has been noodling around, with very little upward movement, constructive consolidating action. Positive catalysts include positive third quarter earnings surprises and the possibility of another rate cut by the Federal Reserve. Also, a reason to remain calm is that any resolution in the China talks will cause the market to rocket higher. Since no one can be sure when any of this will happen, it pays to stay invested. Finally, the past 15 times stocks were lower at the end of August, the rest of the year was higher every single time.

Extreme volatility is here to stay because algorithmic trading is here to stay. It is highly technical by nature, as it reacts to headline news, moving stock market averages and chart patterns, with very little emphasis on earnings of individual stocks. Without the human market makers of the past to dampen daily stock price movements, computers have taken over. Here’s another secret: they are simplistic and are often wrong. The good news is that over a longer term, earnings still matter and determine the direction of stock prices. I know I sound like a broken record, but I can’t emphasize enough the importance of trying, as best you can, to ignore the day-to-day fluctuations in the stock market. Looking at your account over a multi-year period is a better plan. Returns smoothen over time. Over a shorter time frame, fits and starts are the norm, so trying to time the market can be a fool’s game.