September has historically been the worst month of the year for investors. So much for the notion of “Sell in May and Go Away.” If you subscribed to that so-called market strategy in 2020, here is what you would have missed:

The S&P 500 was up:

• 4.5% in May;

• 1.8% in June;

• 5.5% in July; and

• 7.0% in August.

And don’t forget, those four months of S&P 500 gains were on the heels of April’s 12.7% increase.

Five consecutive up-months for the S&P 500. And the S&P 500 just recorded its best August since 1986. If you need more stunningly good news, consider this:

• Over the past 5 months, the S&P 500 is up 35.4% – its best five-month run since October 1938.

The notion of “Sell in May and Go Away” seems downright absurd right now, doesn’t it?

But now we’re headed into September – historically the worst month for the stock market. Will this time be different?

The September Swoon

The “September Swoon” is a seasonal trend in the stock market and one that has been well documented by researchers and the press.  The fact is, September has historically been the worst month on the calendar for stocks – from 1928 through 2019, the S&P 500 Index has fallen an average of 1.0% in September, according to Standard & Poor’s and Haver Analytics.  February averages -0.1% and May averages -0.2%, the only other months with an average loss over those 90+ years.

Seasonal Trends

Seasonality is based only on the analysis of years of historical data.  A seasonal trend is discovered if a pattern emerges in this analysis, in terms of average performance in a certain month.

It’s important to remember, however, that due to financial, psychological, and political factors, stock market behavior can run completely contrary to the seasonal trend in a given year (as it did in 2019, 2018 and 2017). 

Because the stock market in September has shown markedly different behavior, on average, for 90+ years, these results are not coincidental.  There is a genuine seasonal trend.

Possible Reasons for the September Swoon

So, why does the stock market generally drop in September?  What causes the September Swoon?  Economists and financial analysts have studied this topic, but no one has reached a definitive conclusion.  Here are some of the hypotheses:

Summer vacation:  This hypothesis holds that traders and investors are more likely to sell their stocks after returning from their August vacations or long, Labor Day weekends.  Trading volume tends to decline during the summer, and then investors – especially professional investors – get back to trading from their computers.

Third-quarter:  Many mutual funds have fiscal years ending in the fall, provoking them to sell their losing stocks for “window-dressing” purposes.  This term describes the process of a portfolio manager making cosmetic changes at the end of the quarter because they list their holdings at the beginning of a new quarter – their list of holdings looks better without the poor performing stocks.

Tax losses: Investors begin to sell declining stocks to harvest their tax losses, getting ahead of other investors who sell at year-end.  This hypothesis also draws support from the observed “January effect,” where investors buy back the stocks that they sold for tax purposes. 

Tuition time:  With this hypothesis, many investors must sell large amounts of their stock holdings to pay their children’s tuition bills at colleges, universities, and prep schools.  And for most, the school year begins roughly in September.

Seasonal Affective Disorder (SAD):  A university study suggested that the sharp drop in the amount of daylight in New York City in September might trigger Seasonal Affective Disorder (SAD), a type of depression related to changes in seasons.  As a result, according to this hypothesis, some investors become more risk-averse, so they sell losing stocks, unwilling to wait for things to get better. 

Cultural trends (summer vacations, back-to-school in the fall), regulations and taxes (third quarter, tax losses), and even psychological effects of weather (seasonal affective disorder) have been offered as explanations for this strange September market trend. Unfortunately, none of these explanations has been proven, frustrating researchers who seek reasons for patterns in the stock market.  Maybe each of these factors contributes to the trend.  No one really knows the reason for the September Swoon.

Should You Change Your Portfolio?

If someone discovered a convincing explanation for the September Swoon, would this help investors?  Probably not.  Savvy investors might jump the gun, selling stocks in August, and then others might try to beat them by selling in July.  Of course, the seasonal September pattern would then disappear, replaced by some other trend. 

But even if there is no proven reason for this September Swoon, shouldn’t an investor make changes, anyway?  Because of this seasonal trend toward declining stock values in September, traders and investors might be inclined to alter their portfolios.

However, the September Swoon is based on an average, the average monthly performance of the stock market since before the Great Depression.  While September is, on average, the worst month for stocks, this doesn’t mean that each individual September is bad.  In fact, this “September Swoon” notion did not hold true in 2019, 2018, or 2017 (2016 was down 0.12%). No one knows the definite reason for this 90+-year “September Swoon”, so trying to guess which year will be bad is a fool’s game. 

Seasonality vs. Market Timing

Remember, there is a difference between market timing and seasonality.  Seasonal trends reflect how the market will behave in particular months as part of a long-term trend.  Market timing is based on short-term price patterns.  Timing the market perfectly is, of course, impossible.  As discussed above, seasonal trends are grounded in the analysis of years of data, but not every year is identical. 

It is important to remember that investors who trade frequently spend more time and pay more commissions, but they do not necessarily make more money.  The buy-and-hold strategy might be best for you. A knowledgeable financial advisor who understands you and your goals can help.

Partnering with Outside The Box Financial Planning offers numerous benefits for individuals seeking retirement planning, small business support, wealth management, and beyond.  With their fiduciary duty, comprehensive approach, unbiased advice, transparent fee structure, and ongoing support, OTBFP act as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations. 

However, if you would like to take a shot at building a financial plan on your own, we offer our financial planning software, RightCapital, free of charge. Click here to get started.

CARES Act Benefits For Individuals

The Coronavirus Aid, Relief, and Economic Security act – the CARES Act – is the largest economic bill in U.S. history and was designed to “provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”

Spanning close to 900 pages, the comprehensive aid package covers a lot, including direct payments to Americans, expanded unemployment insurance, changes to retirement rules and billions of dollars in aid to businesses.

The CARES Act builds upon earlier versions of federal government support and is the third such bill, coming shortly after the “Coronavirus Preparedness and Response Supplemental Appropriations Act” and the “Families First Coronavirus Response Act” were approved.

Here are a few highlights that might be of interest to individuals:

Rebate for Individuals

The bill would provide a $1,200 refundable tax credit for individuals ($2,400/joint). Additionally, taxpayers with children will receive a flat $500 for each child. The rebates would not be counted as taxable income.

The rebate does phase out as follows:

• Starts to phase out at $75,000 for singles and completely gone at $99,000

• Starts to phase out at $150,000 for married joint filers and completely gone at $198,000

• Starts to phase out at $135,000 for a head of household filers

Unemployment Expansion

Unemployment insurance assistance now includes an additional $600 per week payment to each recipient for up to four months plus extend benefits to self-employed workers, independent contractors, and those with limited work history. The government will provide temporary full funding of the first week of regular unemployment for states with no waiting period and extend benefits for an additional 13 weeks through December 31, 2020.

Waiver of 10% Withdrawal Penalty

The 10% penalty for early withdrawals from IRAs and retirement accounts is being waived for 2020, subject to a maximum allowable withdrawal of $100,000.

Withdrawal amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account caps.

Required Minimum Distributions

For 2020, individuals expected to take Required Minimum Distributions will not be required to withdraw that amount from their IRA or retirement plan.

Coronavirus-Related Distributions

The CARES Act allows for “Coronavirus-related Distributions” which allow participants in IRAs and retirement plans the ability to take a qualifying withdrawal and pay those funds back without tax or interest over a 3-year period. The withdrawal is subject to a $100,000 limit.

There are qualifications for Coronavirus-Related Distributions, however, including:

• Personal, spouse or dependent diagnosis with COVID-19

• Quarantined, furloughed, laid off, or work hours reduced because of COVID-19

• Unable to work due to lack of childcare due to COVID-19

• Own a business that is closed or shortened hours due to COVID-19

• Other factors later specified by the IRS

Retirement Loans

For those unable to meet the Coronavirus-Related Distributions criteria, withdrawals from retirement plans in the form of a loan exists.

Generally speaking, those loans need to be repaid over 5 years and cannot exceed $50,000 or half the vested account value, whichever is less. Now, however, the amount is doubled so that one can take a loan up to $100,000 or half of the vested account value, whichever is less. The loan still needs to be repaid, but payments can be deferred up to 1 year after the loan is taken.

Your Financial Advisor

As with all federal government programs, there are rules, deadlines, and qualifications that can be difficult to decipher. The fact is that while this is by far the largest economic bill in America’s history, it is near impossible for any bill to take into account every unique situation.

So, before you go down a path that might not be in your best interest, set up a CARES Act Benefits Consultation by clicking here or email me at ivan@otbfinancialplanning.com.

This is especially important as the CARES Act is bill number three. And Washington has been talking about bill number four, which will undoubtedly bring more economic relief and changes.

How this late-winter, coronavirus-induced market turbulence affects you depends upon how old you are. For people in or near retirement, it is scary – yet there are ways to offset a shrinking stock portfolio. Regardless of your age, look at market dips as opportunities, not threats.

Eleven Trading Days for the Record Books

For the last part of February and at least through the first third of March, the stock market could be described as “tumultuous.” The S&P 500 Index, the DJIA and NASDAQ are all off more than 10% from recent highs.

The nasty coronavirus is somewhat to blame, but that would be much too simple:

·       Oil was in free-fall

·       The Federal Reserve cut rates by 25 basis points in an emergency meeting

·       Fed-watchers think another 100 basis point rate cut is coming, pushing rates to almost 0

·       Every single one of the 11 S&P 500 sectors is in the red YTD, with the Energy sector off over 40% and the Financials and Materials sectors off over 20% YTD

And here are some history-making days to think about: from February 24th through March 9th, there were 11 trading days:

·       Those 11 trading days saw 5 of the 7 largest one-day-point-losses for the DJIA in history

·       Those 11 days also saw the two best-one-day-point-gains for the DJIA in history too

Now Might be a Good Time to Invest

How such market action, which is normal, impacts you financially and psychologically depends on where you are, age-wise. If you are younger and have long investment time frames relative to your goals, a market dip can be your friend. For example, let’s say you have young children and are saving for them in a 529 college savings plan, and college is a number of years away. If your account is down along with the market, compared to a previous high point, consider adding money.

Ditto if you are saving for retirement in a 401(k), individual retirement account or similar plan. If you save regularly, dollar cost averaging works. That’s where you invest a set amount on a regular schedule, perhaps at the first of each month. When stocks decline your contribution buys more cheaper shares and less expensive shares. Over time your average share cost is less than the current share price.

Is Opportunity Knocking?

If you are retired or some other life event has forced you to live off of your savings, naturally, you are nervous amidst scary headlines and histrionics of media commentators during significant market declines.

But consider heeding the words of the legendary investment manager John Templeton, who famously counseled, “Buy when there is blood in the streets.”

Occasionally you get event-driven market routs such as the aftermath of 9/11 in 2001 and the debt crisis of 2008. In your life span as an investor, you have hopefully saved for rainy days, kid’s educations, future retirement and life-enriching experiences like global travel. When markets dropped, you should have dropped in extra funds. It’s likely that you never bought at the bottom, as that is obvious only with 20/20 hindsight.

Your Investment Policy is Critical

The key is a sound investment policy that allows a cushion – in money market funds or other safe and low-volatility repositories that provides living expenses without having to sell stocks at low levels. Alternative investments in real estate, private equity and financing, energy infrastructure, etc., may also provide cash flows to supplement living needs without selling stocks.

You also may focus on value stocks with good dividends and reasonable P/E ratios. Such portfolios eschew aggressive growth stocks that pay no dividends and have no profits. A hot story may sell, but do economic fundamentals underpin the stock value?

Big Picture

No one likes to see markets continuing to set one-day point-drop records. And while the media continues to scream that the sky is falling, it’s not.

Remember that through the first few months of 2020, we see:

• Low and declining energy costs

• Low and declining interest rates

• Low inflation rates

• Easy monetary policy

• Low unemployment (50-year low)

• A stable housing market

The sky is not falling as winter 2020 comes to a close. But rain clouds and storm fronts can be vexing, unless you are prepared with rain gear. A comprehensive investment policy is the financial planning equivalent of rain gear. You may not be singing in the rain, but you will maintain peace of mind.