Weekly S&P 500 #ChartStorm - 4 Oct 2020

Those that follow my personal account on Twitter will be familiar with my weekly S&P 500 #ChartStorm in which I pick out 10 charts on the S&P 500 to tweet. Typically I'll pick a couple of themes to explore with the charts, but sometimes it's just a selection of charts that will add to your perspective and help inform your own view - whether its bearish, bullish, or something else!

The purpose of this note is to add some extra context and color. It's worth noting that the aim of the #ChartStorm isn't necessarily to arrive at a certain view but to highlight charts and themes worth paying attention to. But inevitably if you keep an eye on the charts they tend to help tell the story, as you will see below.

So here's another S&P 500 #ChartStorm write-up!!

1. Happy New Month! The S&P 500 dropped 3.9% during September in a risk-off trading environment that featured an early melt-up in mega cap tech stocks, only to see them fall sharply over the ensuing few weeks. At the low, SPX was off 10% on an intraday basis as election and political/stimulus risks mounted. The VIX was elevated through September, but dropped back to the mid-20s by late month.

Treasuries continued to be somewhat rangebound with the benchmark US 10-year rate hovering in the 65-70 bps range; since April, the 0.50-0.85% range has generally held. The US Dollar Index was a popular short-trade during the summer, but the Greenback actually rallied 2% during the often-volatile & ‘flight to quality’ month of September. Elsewhere, gold fell 4% while WTI lost 6%.

After surging throughout the summer, stocks finally took a breather. And it was right on cue as September is infamous for being the most volatile month on the calendar and a difficult period for the bulls. We now turn to the fourth quarter, which often features bullish seasonality. This year, however, new risks have emerged with the US election four weeks away and fears of a second wave of COVID-19 hampering economic growth during what is the most important stretch for many businesses’ top line.

Bottom line: September lived up to the hype of being fraught with volatility and downward trending equity markets. US large caps finally felt the brunt of the selling pressure while international equities were down to a lesser extent. Emerging and frontier markets were off just fractionally. Looking ahead, volatility remains elevated, and virtually all equity markets have work to do in order to retrace to new highs.

monthly chart of the S&P500

2. Not so happy September for the S&P500 -- 3rd from the bottom for the month. Diving deeper into returns across the global markets and in other sub-asset classes, US small caps could not catch a break versus their large cap brethren. Small issues were down 4.8% versus the 3.9% drop for large caps.

Early in the month, it appeared the mega cap tech/communications/retail stocks were going to fall off a cliff as the FAAMG stocks were all down 10-20%. But the glamour group’s resiliency was shown with buyers stepping in during the last week of September to bring the Information Technology sector to the middle of the pack in terms of sector returns. Info Tech was down 5.3% for the month.

The big loser, as has become familiar by now, was the Energy sector. Shares in oil & gas firms fell another 15% to become just 2.1% of the S&P 500’s market cap – the lowest in its history. Weakness was seen in US MLPs which dropped 14% as well. In the alternatives space, REITs were down 3-4% and are off about 20% for the year. Meanwhile, despite the US Dollar’s advance, non-US equities outperformed – particularly in the Emerging Market and Frontier Market spaces.

Across the Fixed Income world, it was another snoozer of a month. There was little change among Treasuries and International Sovereigns. The only move of significance was about a 2% total-return drop in EM debt (despite EM equities’ relative strength versus US stocks).

Bottom line: September had the early hallmarks of a classic harsh decline for global equity markets, but some strength during the final few days of the month prevented a significant decline. In the end, equities are about where they were back in early August as the gains from Q3 have been consolidated.

asset class returns chart for September 2020

3. Happy New Quarter... typically the best quarter of the year according to this chart from @RyanDetrick. The bulls are relieved to make it to October. While the first half of this month can be quite uncertain, the timeframe kicks off a fairly reliable bullish seasonal trend.

The run-up to year-end is usually strong for global equity markets. For the S&P 500, Ryan Detrick shows us that Q4 is historically the best quarter of the year. The average return since 1950 is 3.9% versus about 1.6% for the other three quarters. Remarkably, the positivity rate (no, not THAT positivity rate) is 79% - meanwhile SPX boasts a positive return in 79% of the Q4s in the last 70 years.

We don’t have to go back to far to find an anomaly though – recall Q4 2018’s sharp correction and a borderline bear market. SPX fell just shy of 20% from the early October peak to the December 26 low that year. It seems like ages ago considering the COVID flash bear market this year.

Bottom line: While there are many takes & spins on seasonality & cycles this time of year (and considering the election cycle comes to a head in four weeks), the definitive word is that Q4 often has a bullish bias. Seasonality should be a secondary indicator of what is happening among the major global equity markets price-wise, but it’s still something to consider if you are aggressively short.

3a. (and for those who will ask, it's still good in election years)

We’d be remiss not to dig deeper into Detrick’s analysis at LPL Research by analyzing S&P 500 quarterly returns based on the highly popularized four-year election cycle. Right now, we find ourselves kicking off Q4 of the ‘election year’. This quarter (out of the 16 in the cycle) is one of the best in terms of its positivity rate – above 80% since 1950.

The average gain is somewhat modest at just 2.0%. The handful of quarters leading up to the election year (aka the pre-election year) are usually the best in the set as politicians look to juice-up the economy so they can keep their cushy jobs in Washington DC. The bearish period of the four-year election cycle begins next quarter (Q1 of the post-election year) and runs through the summer of the mid-term year. So, the bulls may want to soak in the bullish trend for now as the cycle points to volatility starting in just a few months.

Bottom line: While it’s interesting to analyze cycles, any given year can stray greatly from the long-term average. We have seen that all-too-often in the last few years. Q4 2018 (which is Year 2 Q4 in the chart below) was awful for stocks even though the mid-term year Q4 is the 2nd best in the cycle over the long run. And now just this year, 2020 hasn’t followed the seasonal/cyclical script well at all. So, take it all with a grain of salt.

stockmarket quarterly seasonality in election years