Last month we wrote that September has historically been the weakest month in the stock market. The month began with nearly a 1.5% decline the morning of September 2nd, but investors rushed to buy the dip. The pattern continued in the following weeks, and the market finished up 3.5% for the month. Such dip-buying behavior from investors, especially during a time when the market has had numerous excuses to sell off, is a testament to the strength of this bull market and should be viewed bullishly going forward.
October begins with a government shutdown. Historically shutdowns have had little to no lasting impact on the stock market according to data from Bespoke. As we often remind clients, following the political soap operas “As The Beltway Turns” and “The Old and the Powerful” may be entertaining, but it is a distraction for investors.
From a technical perspective, the indicators generally suggest the market remains healthy. Breadth (the number of stocks participating in the rally) has been solid, and leadership remains in risk-on sectors. In addition to Technology and other tech-heavy sectors, the Industrial and Financial sectors are among this year’s top performers so far. Meanwhile, less economically sensitive sectors such as Consumer Staples, Healthcare, and Real Estate are the worst performing sectors. This performance mix signals that investors are confident about the state of the economy.
Many investors are wary of historically high valuations and a market that has advanced relentlessly. While this is the case in US large cap stocks – we would argue it is also well supported by fundamentals – it is not the case in small cap stocks. The small cap index only recently broke above its levels from early 2021, and its valuation is far below that of large caps according to data from Morningstar. Additionally, rate cuts from the Federal Reserve should serve as a tailwind for these companies which rely more on outside funding sources than large company stocks. We expect to add to this area in the near future.
The market is overdue for a pullback, but there is not a clear potential catalyst in the indicators right now. That will change at some point, and investors should be emotionally prepared for that. But any pullback should be viewed optimistically in the context of an ongoing bull market.
This is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here.
