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The S&P 500 is having a rough start to the month of September.
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It’s historically the weakest month of the year for the index, with an average decline of 3.8%.
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Investing pros say they’re eyeing areas like housing and bonds. Some say to buy any dips.
It hasn’t been an amazing start to the month for stocks.
The market is kicking off September in the red, with the Dow dropping more than 500 points on Monday as investors cashed in some of their recent gains and fretted over the impact of President Donald Trump’s tariffs.
But that would be considered par for the course for the stock market, which has historically struggled during the month of September — commonly referred to as the market’s weakest month of the year.
Historically, the S&P 500 has shed an average 0.7% over the month of September for the last 75 years. In months when the benchmark index lost, the average drawdown for the month was 3.8%, according to an analysis from LPL Financial.
But that isn’t to say there isn’t room for investors to get into or stay in the market, so long as they’re willing to stomach some volatility.
“Seasonal data represents the typical climate for stocks but not the weather,” Adam Turnquist, chief technical strategist at LPL financial, wrote in a recent client note. “And currently, the weather for the S&P 500 is filled with blue skies and record highs. When accounting for momentum and trend, which we believe is much-needed context, September doesn’t look so bad.”
Here are four ways traders should be looking at the month ahead, according to the combined recommendations from seven investing pros:
1. Buy any dip
A stock sell-off this month could be your friend, if you’re willing to look at the decline as a buy-the-dip opportunity.
In a note to clients on Tuesday, strategists at Morgan Stanley said they remained “buyers of dips should they come” in the coming months, despite weak seasonal trends for stocks. That’s partly because the bank doubts the market has fully priced in the bullish impact of the Fed’s expected rate cuts, with central bankers most likely teeing up a 25-basis-point cut at the end of the month, according to the CME FedWatch tool.
“We push back on the idea that rate cuts are already priced as equity returns tend to be strong during rate cutting cycles, and rate-sensitive areas like small caps are barely off the relative lows,” a team led by Mike Wilson, Morgan Stanley’s chief US equity strategist, wrote.
Other forecasters on Wall Street have also expressed faith in the market’s long-running upward trend.
Speaking to CNBC on Tuesday, Wharton economist Jeremy Siegel said he believed the bull market still had further to go, pointing to incoming Fed rate cuts, strong corporate earnings, and historically normal valuations in the S&P 500 when excluding the Magnificent Seven companies.
“September being historically really the worst month of the year. Listen, you know, certainly we could have a pullback,” he said. “I still think the bull trends are intact.”
2. Diversify into bonds
Now could also be a good time for investors to diversify their portfolio in the bond market, strategists at Société Générale wrote in a note last week.
The European bank pointed to a thinning gap between the performance of equities and bonds in recent months. A separate analysis from Apollo Global Management found that investment grade corporate bonds and short-term US Treasurys had been outperforming expected returns in the S&P 500 in recent years, based on the index’s forward earnings.
“Diversification into bonds is becoming beneficial again, especially in the US,” SocGen wrote.
In its latest weekly commentary, BlackRock also said it had a strategic, five-year call on bonds.
“We are overweight short-term inflation-linked bonds as US tariffs could push up inflation,” strategists wrote in a note last month.
“The bottom line is that fixed income remains more attractive than the implied yield levels in public equity markets at the moment,” Torsten Sløk, Apollo’s chief economist, wrote last week.
3. Buy housing stocks
Stephanie Link, the chief investment strategist at Hightower Advisors, said she liked areas of the market that were considered to be less expensive compared to the broader S&P 500 index. Speaking to CNBC on Tuesday, she highlighted housing in particular, given that activity in the sector is showing some signs of ramping up.
Existing home sales in the US crept up 2% on a seasonally adjusted year-over-year basis in July, thanks partly to the small improvement in housing affordability, the National Association of Realtors said.
Housing stocks have also tended to do well at a time when earnings across the broader market have struggled, Link noted.
“I am a big housing bull. I think that we’re just starting to see a recovery in housing,” she said.
“We have maybe a rocky six weeks. So I think you take advantage of that,” she added of the broader seasonal weakness in markets. “I think the fourth quarter is going to be very strong. And so I think you want to be buying some of the volatility.”
4. Focus on large-cap names
Ryan Detrick, the chief market strategist at Carson Group, said he was favoring the market’s leading large-cap names as stocks head into their historical period of weakness. That’s because there’s potential for inflation to climb higher, which means the Fed may cut rates less than markets currently expect.
Anticipated rate cuts are a major reason why small and mid-cap stocks have rallied in recent weeks.
“What does that mean? Well, I stick with who brought you to the dance. Those large caps,” he told CNBC last week, adding that he also had exposure to areas like industrials and financials. “We’re not overweight small- and mid-caps here.”
“You look at the kind of leadership, I love it. What’s even lagging, like even more,” he added, pointing to large-cap laggards in areas like consumer staples and consumer discretionary.
Stocks also had strong momentum heading out of August, which is a positive sign for equities even amid seasonal weakness, Detrick said. At the end of the second-to-last week of the month, 90% of stocks traded on the New York Stock Exchange were in the green. That’s an extremely rare occurrence in financial markets, with only 12 instances of that happening since 1980, he said.
“So even if we have a little seasonal weakness, after a 30% rally, I think it’s going to be contained,” Detrick said of any coming pullback.
Read the original article on Business Insider