Just a Minor Bump Ahead
Key Takeaways
Although no one can conclusively prove why, Aug and Sep have traditionally been the weakest months in the year for markets.
Returns after a sell-off are generally stronger, and even with the current minor sell-off, global stocks (e.g. the United G Strategic Fund — one of our core funds) is up over +11% this year so far.
Getting a positive investment experience is in the years, not the days. We may encounter some speed bumps, but eventually, we get back on track.
For those who have a shorter time horizon, asset allocation is key to reduce volatility during bumpy times.
The stock market is a device for transferring money from the impulsive to the patient, from the overreacting to the disciplined.
As markets take another breather for the year, pessimistic and negative market news are beginning to appear more frequently. Financial commentators are attributing the current weakness to the Sep 2023 Federal Reserve meeting and how interest rates could stay higher for longer. However, the whole story about rate hikes and high inflation is not a new one. As such, what is happening in the markets now is more akin to a speed bump — it will slow you down somewhat, but overall, it’s certainly not going to derail your journey.
In 1927, Arthur Compton won a Nobel Prize in Physics after he discovered an x-ray scattering effect now known as the Compton Effect. He was involved in the infamous Manhattan Project, which involved the research of nuclear weapons during WWII. A little known fact is that he invented the speed bump in 1953 after witnessing speeding cars at the university where he worked.
What he wanted to achieve was not to bring the vehicles to a complete stop, but rather, reduce their speed to approximately 25mph (40km/h) in order to improve safety around the campus.
This is very similar to what’s happening in the markets over Aug and Sep. Slowing down slightly, but not derailing the trajectory of performance.
When you consider the performance of global stocks over the past 36 years, Aug and Sep are traditionally the weakest months in the year for markets. Why does this happen? Nobody can really pinpoint an exact cause. In the past, markets could have been influenced by the seasonal patterns tied to agriculture, but this is likely to be less significant in today’s technology heavy era. A more logical cause could be due to fund flows due to year-end financial industry and business bonuses. In addition, many countries adopt an April/May income tax filing deadline, which could lead to tax-loss harvesting during those months. As long as other factors like financial stress, market momentum, or market health do not break down, then we should see a nice setup for a year end rally into 2024.
At the beginning of this year, we wrote about how investors can expect better returns after suffering losses in 2022. Why are there better returns? It’s because asset prices recover after suffering from a “re-pricing” during periods of uncertainty. So this is also the reason why changing your investment allocation in a panic by going into conservative assets like cash during a period when prices are going down, you do not get to ride the recovery period up.
So, after 2022 where a diversified global stock market went down -20%, the next year’s average return is around 20%, with the following 3 years providing around 13% per year and the 5 year period giving 14% per year. Granted, these may not happen all the time as each market situation is different, but from a probability perspective — the chances are good.
From a scorecard perspective, how are markets doing so far this year? Even with the current minor sell-off, global stocks represented by the United G Strategic Fund; one of the core funds we utilise in some of investment portfolios, is up over +11% this year. As such, we are just over halfway there in trying to reach the average 1 year return after a sell-off, with a few more seasonally strong months coming up.
An investment journey is not made up of days or even months. It is likely to be measured in years. The bumps we encounter along the way sometimes slows our journey down — some may be more severe than others — but eventually, we get back on track. Investors with many more years ahead will look back on the sell-offs they encountered and realise that it was small in comparison with the larger picture. For those who have a shorter runway, asset allocation comes into play — the mix of high grade, short duration, cash-like holdings will help reduce volatility and allow withdrawals or payouts to still continue when you hit speed bumps.
