Posted September 1, 2017

S&P Erases Mid Month Decline

Over the past 30 years August has been the most difficult month for the market.  The market began the month with a continuation of the July rally, but then geopolitical concerns combined with turmoil in Washington to send the market lower mid-month, with a couple of triple digit down days and even the 2nd worst week of the year.  Market participants seem to be focused on tax reform so, despite Hurricane Harvey, the market moved higher at the end of the month on reports of Congressional common ground.  At one point the S&P 500 was down 2% for month, but at month end had rallied back to a gain of 1 point and is now up 10.4% for the year.  Both the Dow Industrial average and NASDAQ Composite finished the month with fractional gains but oil, thanks to the flood related closure of refineries, finished the month, despite a strong last day rally, down 6.3%.

The first week of the month was filled with good news, with better than expected economic data out of China, a surprisingly strong quarterly report from Apple during what was supposed to be a transition quarter ahead of the new iPhone 8, and a government report that a better than expected 209,000 new jobs were created in July.  The Dow Industrial average traded above 22,000 for the first time in history but the S&P 500 gained just .2% for the week and the tech heavy NASDAQ finished lower.  The second week began with the Dow hitting an all-time record high for a 10th consecutive day before geopolitical concerns surrounding North Korea sent the market sharply lower.  The market closed the week with its 2nd worst performance this year as the S&P 500 lost 1.4%.  The third week began with a toning down of the rhetoric with North Korea that resulted in Monday being the best day for the market in 4 months.
Mid-week turmoil in Washington led to concern about whether Republicans will be able to pass tax reform and/or any part of their pro-growth agenda and that brought the sellers back out, sending the S&P 500 down .7% for the week.  The last full week of the month started with the Monday solar eclipse that sent volume to one of the lowest levels this year. The big day of the week was Tuesday with a report of Congressional common ground on tax reform sending the Dow 200 points higher, once again, its best day in 4 months. Later in the week comments from Trump that he will build the wall even if it means shutting down the government created some selling pressure but the S&P 500 ended the week ahead of Hurricane Harvey .7% higher.  This week most news was centered around Hurricane Harvey, and a report that North Korea had fired a missile over Japan was good for a 100 point selloff that was reversed by the end of the day.  The market rallied into month end.

Over the past 30 years the worst month for the market has been August, but historically the worst month is September.  September has an average rate of return of -1.1% and has finished in the red 55% of the time.  The market continues to be richly valued and geopolitical concerns are creating uncertainty.
We have been cautious over the past few months due to valuation, and while that has been unnecessary, we believe in the short term continued caution, considering seasonality, is warranted.  The market is likely to focus on tax reform, and success in that area could give the market another leg higher.  The risks continue to be lack of success on tax reform and unknown geopolitical events.