where’s the September stock market swoon?

Month to date, both the S&P and NASDAQ indices have each fallen by about 4%. That’s roughly half the average decline for September, the signature month for mutual fund selling.

The tepid fall comes on the heels of gains through August of close to 20% for the major indices–which suggests that a correction might be on the cards. And it is occurring while the financial news is at best mixed. JP Morgan CEO Jamie Dimon is suggesting short rates could rise another 150bp from the current 5.5%, in a potentially stagflationary (i.e., high inflation + economic stagnation) environment, auto workers and Hollywood actors are on strike, and, channeling Latin American politics, the party of Lincoln is warming up to nominate for president the would-be dictator who tried unsuccessfully to overthrow the government after he lost the 2020 election.

Of course, a September-October selloff may still occur, even though it’s pretty late in the day by past experience for this to happen. And there could also be yearend selling by December-year corporations like banks and insurers. Nevertheless, the current resilience suggests to me that the stock market has defensive qualities that the consensus, which I take to be relatively bearish, doesn’t appreciate.

Where would pockets of value be?

Two areas strike me as potentially interesting:

–beaten-down tech stocks, especially companies that IPOed during the pandemic. The key here, I think, to separate high-quality survivors that have been caught in the overall tech downdraft of 2021-22 from today’s functional equivalents of pets.com during the dot com bubble, that is, firms that have little merit but were able to raise a bundle of cash in a highly frothy environment (e.g. think: SPACs). Firms like this may look attractive on a price/book basis, but the worry is that outsiders like us have no control over how managements use the company’s cash.

–steady growers among mid-caps outside the tech area. I’m not sure there’s any one thematic area to concentrate on. There may be something in the population shifts that working from home are prompting, or the winners from the shift to electric vehicles. But I think this is more a company-by-company search for firms that re cheap relative to their growth prospects.

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