September, historically, is the worst month of the year for the stock market. It appears the fundamental reason is that earnings reports for the first and second quarters don’t really tell the full story of how corporations are doing for the year. The third-quarter earnings are really important since they give strong guidance on how corporations will do for the calendar year. Most significant reporting doesn’t begin until the third week in October. The anticipation of what these reports might look like gets the markets a little spooked in September.

After 18 months with relatively low volatility, coupled with a steep market rise, it is not unusual for the stock market to “pull back”. Does this mean the economy is sinking? Perhaps the concern is more about how consumers might react if the federal government shuts down. The stand-off in Washington is being played out to consumers who are giving this Congress confidence scores of under 20% and a President who has made a number of missteps recently. The rise of the Delta variant of Covid 19 and the increasing hospitalizations and deaths do not help matters either. Internationally, we can add that China is taking major steps to deleverage its economy and reduce its carbon footprint by cutting back on industries' use of coal to generate electricity. This has major consequences on the production of goods coming from China. The ports in California have a three-week back-up of cargo ships. Finally, there are lots of job openings but an insufficient number of people to fill them.

As investors, we need to look at all of this and put it in perspective. Then attempt to make sense out of what is happening to determine our investment strategy. The use of diversification and having a longer-term view help. With this perspective, we need to look at where the economy might be next year. It seems likely that all of the above will lead to slower growth in 2022 than we might have expected earlier. Through diversification, our exposure to the stock market is reduced, and while not eliminating volatility it does reduce it. For now, it seems that the best approach is to stay with the diversification that meets each individual’s risk tolerance. Hopefully, the picture will be clearer by the beginning of December.

Ed Mallon

September 30, 2021