the usual September stock market selloff this year?

I got an email last week from my brother-in-law, an experienced stock market investor, asking whether I thought we’d have the typical equity mutual fund/ETF September-October selloff in 2021.

I didn’t have a good answer then, and I don’t have a good one now.

On the “selloff” part, one could easily interpret the current market weakness as the start of the annual seasonal decline. Even if that’s not right, I don’t see any reason to doubt that the tax and dividend planning that typically produce weakness during September-October will occur.

On the other hand, I hadn’t realized until I consulted Investment Company Institute data the staggering level of net equity mutual fund redemptions that occurred during the Trump administration. They total $1.4 trillion+, or 7x the withdrawals during the financial crisis of 2008-09. They’re 3.5x the cumulative outflows during the eight Obama years, which seem to me to be mostly financial crisis-related. This suggests to me there’s still a lot of money on the sidelines. (Yes, some Trump-era withdrawals may have gone into ETFs, but total stock ETF issuance is only running at about $150 billion/year.)

So selling, yes. But will sideline money come in to absorb at least part of this? No clue.

Another point: during the latter half of Trump’s term, as the magnitude of his economic incompetence became more evident, the equity market rotated strongly away from companies whose earnings derive from the domestic economy to those with substantial operations outside the US. As the administration wilted in the face of the pandemic, rotation extended to stay-at-home beneficiaries.

Early this year, my sense is that the market began to rotate again, away from stay-at-home and international names toward domestic economically sensitives. This was primarily a valuation judgment, I think, meaning that the motivation came (as it usually does) ahead of a turn in the economic fundamentals and was based on the perception that very good thing that could possibly happen was already priced into the 2020 winners and every plausible bad thing into domestic cyclicals.

Then the delta variant emerged, adding three-plus World Trade Centers-worth of Americans to the dead each week to a total now approaching 700,000 fatalities. Oddly enough, the oath-brothers to the fallen heroes honored at the WTC, first responders who gave their lives so others could live, appear to be major opponents of life-saving vaccinations–choosing to avoid the “risk” of vaccination, but thereby causing others to die. Nevertheless, at some point the market will begin to argue that the worst is already in prices and will restart the rotation toward cyclicals.

Why go on about this? I think it’s curious. More important, after a sharp decline new leadership typically emerges. Because of this, if there is a September-October downward move for stocks, it may well mark the finale for stay-at-home and a resurgence for domestic cyclicals. In any event, it will likely be important to identify both leading and lagging groups–on the way down and on the way up.

So this may be an unusually information-rich selloff, if it happens.

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