The ‘September Effect’ is a calendar-based market anomaly where stock market returns are consistently negative for the month. Of course, this theory may or may not apply depending on the year. But, it certainly proved true in 2023.
September Market Performance:
- Bonds:
- VAB – Canadian Aggregate Bond Index ETF: -2.5
- VBU – US Aggregate Bond Index ETF: -1.6
- VBG – Global ex-US Aggregate Bond Index ETF: -1.1
- Equity:
- S&P500: -4.7%
- DOW: -2.7%
- TSX: -3.5%
- FTSE100: 1.9%
- NASDAQ: -6.3%
September was a bad month for the capital markets. The primary driver was when Jerome Powell of the US Federal Reserve made his latest interest rate announcement. In September the Fed chose to keep interest rates unchanged at 5.5%; one would think that is a good thing… However, the market reacted negatively afterwards when he signaled one more rate hike this year, and then only two cuts in the latter half of 2024. The market was expecting there would be 4 rate cuts in 2024, so the news that only 2 are on the table (at the moment) and rates being higher for longer spooked the markets.
The prospect of “higher for longer” interest rates have significantly hurt mega-cap tech stocks. Tech stock returns rely on future growth and if rates are higher for longer that means the companies will need to pay more on their debt for longer instead of investing that capital back into the company for continued growth. As a result, the NASDAQ fell -6.3% in September.
Recently, I’ve received questions about putting one’s money into GIC’s given where rates currently are. Some GIC’s are guaranteeing a return of 5% or more. This sounds nice, but it isn’t the whole story. So, I wanted to provide some context to what the banks are offering:
1 Year GIC Paying 5.95% breakdown:
- To get the good rates being offered, you must lock-in your money for the full term. So, what happens if you need access to that money for emergencies or daily expenses? You are out of luck and can’t access it until the year term is done.
- Inflation is currently 4%… Your 5.95% GIC net return is now 1.95%
- If you hold your GIC in a non-registered investment account, the 1.95% is interest income and is fully taxable at your marginal rate.
- At a tax rate of 30.5%, your GIC net return after tax is 1.36%
Cash is attractive at the current rates, but in many cases, the net amount received is much less than the posted rate.
In times like these the perceived safety of cash will draw significant inflows. On the one hand some investors may need to be in cash for short term expenses. But on the other hand, this can indicate a period of capitulation in the markets where investors have cash on the sidelines that is ready to be deployed in the coming months.
With all this being said, where do we go from here? During times of market uncertainty, the best thing is to remain diversified. In the coming months there will likely be market surprises. Your fixed income (bond) holdings have been hurt over the last two years, but looking forward, you are finally receiving a substantial yield for holding them. As for equities, it is best to remain globally diversified. Compared to international investments, US holdings are now more correlated to each other resulting in excess risk, and are significantly more expensive.
