Macro muddle in markets and the "curse of September"
China, US jobs and oil jostle stock markets. And a new war looms?
I'm back in the saddle, or rather the desk chair, after a few weeks staying with my parents in the Sussex countryside, in South-East England. The logistics of writing from there simply proved too complex this time, due to a sketchy internet connection and lack of a refuge to think.
My apologies for the interlude in your inbox. But rest assured, now that I'm back in my urban bunker in Buenos Aires (okay, 7th floor apartment), that you'll be getting plenty from me in coming days and weeks.
Soon I'll be sending you Chapter 4 of my investment book, "Getting a Better Class of Enemy - Money, Markets and Manias" (for paid subscribers). Look out for that shortly.
It's in advanced draft stage and will deal with the fundamentals of compounding and doubling times. It's absolutely crucial that all investors have a good grip on these concepts if they want to prosper over time.
Even if you're familiar with the basics of compounding, I believe you'll gain some important new insights from what I'll cover. In the meantime, don't forget that you can find the book's chapter plan and previous chapters at this link.
I'll also be working on the second part of the Legacy Portfolio Update (ex-UKIW), now that the remaining companies have reported (see the first part here). Just today (Friday), Computacenter (CCC.L) reported strong first-half results and the share price has rocketed over 15% on the day.
This is a good reminder of why patience pays with stocks, especially if there are good reasons to believe that a company has strong prospects. In Computacenter's case, this largely comes down to a rapid expansion in the USA, which was part of the original investment case.
But that didn't stop the share price from sagging significantly last year, along with stocks in general. The company is also piling up cash, and has indicated that it will make a substantial cash return to shareholders "no later" than the end of 2024. I'll have more details next week, once I've digested all the reports.
The "macro muddle"
Despite my technical challenges in England, I still managed to keep at least one eye on market developments. Overall, I'd say the past month is what you might call a "macro muddle", with stock markets riding the pogo stick of daily news.
A few weeks ago there were loads of reports of impending debt defaults by Chinese real estate developers, and general predictions of a meltdown in the Chinese economy and financial system. This sent global stocks down.
A week later, and the big macro data point was that US job openings were fewer than expected, indicating a weakening economy. This triggered expectations that US interest rates would cease rising, or fall, sooner than expected. This sent stocks up.
Then earlier this week it was announced that Saudi Arabia and Russia would prolong their previously announced oil production cuts, sending the oil price higher. That's the old supply-demand curve kicking into action. Since higher oil prices are inflationary, this pointed to more pressure to keep interest rates higher for longer. This sent stocks down again.
This sort of macro noise is sort of important, but often not nearly as much as the media and investment strategists like to think. Put another way, macro news can be a big deal for speculators who are punting on short-term price swings. But it doesn't really make much difference to patient investors in stocks of strong companies with reasonable valuations, with an eye on the medium to long term. Prices can move in the present, but the end result is unlikely to change vastly in future, several years out.
Jumping back to China, I'll add a few more thoughts. I first started to learn properly about the place back in 2001, when my employer at the time (UBS Group) dispatched me there on a project. The task was to come up with a comprehensive strategy to expand into mainland China across many business lines.
Prior to that, the bank's presence in China consisted of what I refer to as "a man with a typewriter". Okay, it was about four people split between two tiny representative offices in Beijing and Shanghai. But it was certainly a tiny outpost of the bank's corporate empire. (Although the Hong Kong office was substantial, with about a thousand employees. But there were new business opportunities opening up on the other side of the border.)
Ever since that time, over two decades ago, I've seen regular predictions of China's economic and financial demise, usually produced by hopeful Western analysts. All of them have proved wide of the mark.
In the intervening period since 2001, Chinese GDP has grown more than 13 fold, from US$1.3 trillion to US$18.0 trillion. So, forgive me if I remain wearily sceptical that the Chinese juggernaut is about to slam into full reverse this time.
(By the way, that huge leap in GDP is a great example of compound growth in action, the topic of my forthcoming book chapter. If Western policy makers had a better grasp of the compounding concept, I'd be willing to bet that they wouldn't have welcomed Communist China into the global trade system so warmly, back when it was still a small economy. Now they're trying to contain China by squeezing the stable door shut. But that horse bolted a long time ago.)
That said, despite my scepticism, you never know. A Chinese financial crisis can't be ruled out completely. Maybe things really are different this time. Certainly, a Chinese recession is a clear possibility in the near future. But that's nowhere near the same as an economic and financial implosion.
In any case, as I've said before, I believe that investors should give China a wide berth these days. The political risks are simply too high, either in international matters (Taiwan, US sanctions) or domestically (severe and sudden government intervention in booming industries, to remind everyone who's the real boss).
From an investment standpoint, China could easily become the next Russia. That could happen very suddenly, resulting in collapsing prices or, even worse, stranded assets for foreign investors.
On which note, if you have investments in any global or emerging market investment funds, I recommend that you check how much of their portfolios are invested in Greater China. That constitutes the mainland (People's Republic of China), Hong Kong and Taiwan.
For example, any investors in an exchange-traded fund (ETF) that tracks the MSCI Emerging Markets index - which is a common sort of product - should know the following. At the end of August, that index had a 30% weighting to mainland China and 15% riding on Taiwan. Add in the impact on neighbouring states of a potential invasion of Taiwan one day, and it's clear that most of any investment in such a fund could disappear overnight.
Notwithstanding my preference to avoid investing in China, it's still worth keeping an eye on what's happening there. Just today I saw something showing that Chinese ports churn through 4.3 times as many shipping containers as American ones, which ranked second (see here for a graphic with more details). That really is a staggering gap.
Given the real risk that China goes on an "adventure" across the Taiwan strait at some point, that should give real pause for thought for anyone investing in container shipping companies, to give one example.
The "curse of September"
The fourth quarter has a habit of being tricky for stock markets. In particular, the month of September is particularly cursed, in terms of the historical record.
Analysis by a firm called Yardeni Research looks at the historical record of monthly returns for the S&P 500 index of US stocks (or predecessor index), from 1928 to 2023, a span of 95 years. It highlights the following:
September was the only month in an average year where more stocks within the index fell in price than rose.
On average, the index fell by 1.1% in September. This was by far and away the worst month. Only two other months had negative average historical returns, being February and May. But those both fell an average of 0.1%, far less than September.
A one percent-ish average fall in September may not sound that bad. But remember that it's the average for the index across many years, and the index itself is the average of a large number of individual stocks.
What could possibly cause a repeating pattern in stock market performance, according to the month of the year? Can stock markets really be seasonal? What could cause such seasonality?
It's worth noting that the northern hemisphere is where the vast bulk of investor money is based. It's the location of all the world's largest financial centres, such as New York, London, Zurich, Hong Kong and Tokyo. Those are the native habitats of big money managers and institutional traders.
What's more, most private financial wealth is owned by people from the northern hemisphere. That's where most billionaires and other "UHNWIs" - or ultra-high net-worth individuals, to use the wealth management jargon - are based.
Here are a few possible reasons that I can think of for this historical weakness in September.
Traders and fund managers have time to think more deeply when they're on summer holidays during August, and away from endless distractions in the office. They may start to doubt previous convictions, and begin to sell positions when they return to their desks in September.
Autumn is a depressing time of year, as the delights of summer draw to a close and the gloom of winter approaches. This changes the overall mood of market participants and makes them more pessimistic.
By September, the end of the year is looming into view. Market professionals get paid bonuses based on end of year results. Thus, many decide to lock in some profits by selling investments, dialling down their risk. The extra selling pushes down prices.
We're only a week and change into September and the S&P 500 is only down about 1.5%. But there's still plenty of time for bigger falls.
What should you do about? Probably nothing. Just because there's a historical pattern doesn't mean the market will plunge this particular year. If you've got good investments, trading at reasonable prices, and are investing on a multi-year view, then second-guessing short-term market moves isn't recommended. That market could simply climb.
Not least, it could be just pure chance that September has been the worst month for stocks, on average. Perhaps there are no general reasons that lead to a market seasonality. It's just the way things happened to work out in the past, and the future could be completely different.
But, if stocks do drop sharply in the coming weeks, it could be a good opportunity to scoop up some bargains at lower prices. Over the same 95 year time span for the S&P 500 index, October averaged a gain of +0.6%, November +0.9% and December +1.3%. (But again, that might just be a random outcome.)
A new war looming?
Finally, here's another macro issue that has the potential to cause a market wobble. A friend and his family have been visiting Armenia for a couple of weeks, and had a great time by all accounts.
He told me that he received a message today from a contact in Azerbaijan who knows people in that country's military. The message was (to paraphrase): troops are massing at the border, and war could break out at any minute.
Given the war in Ukraine, not that far across the Black Sea, this would hardly be good news for regional stability. Especially if outside powers get involved, and a country-specific war starts to look like a regional one.
My friends were strongly advised to get out of Armenia as soon as possible. Fortunately, they had already flown to Venice, Italy on Thursday. Phew.
But it just goes to show, you never know what's around the corner.
And perhaps referring to my "urban bunker" in Buenos Aires - located very far from the world's potential trouble spots - isn't so inappropriate after all.
Please send your comments or questions to the email shown below.
Until next time,
Rob Marstrand
ofwealth@substack.com
The editorial content of OfWealth is for general information only and does not constitute investment advice. It is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision.