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The S&P/ASX 200 index is currently undergoing a phase of consolidation following a remarkable five-month upswing from April to August, during which it surged by 14.4% and surpassed the significant milestone of 9,000 points for the first time.
The index’s 1.3% drop at the beginning of September aligns with its historical trend, as September has often been the weakest month for equity markets.
September’s Disreputable Reputation
Insights from analyst Carl Capolingua reveal the challenges associated with September’s historical performance:
- Negative Returns: Historically, September stands out as the sole month with an average negative return of -0.11% over the past 40 years.
- Major Market Crashes: Key downturns have typically commenced in September, notably the lead-up to the 1987 market crash and the Global Financial Crisis in 2009.
- Low Success Rate: The ASX only sees gains in September 52.5% of the time, the lowest rate among all months.
- Recovery in October: The month often delivers modest gains, with an average increase of +0.07% as markets usually bounce back from September’s downturn.
Heightened September Volatility
Recent patterns suggest that the volatility extends beyond the month itself. Notably, historical data indicates increased turbulence beginning in week 36, with the period from September to November often hosting the year’s poorest trading weeks for the All Ordinaries.
The deterioration in performance this month is evident from recent trends:
- In the past 40 years, September has posted a slightly negative return (-0.11%) with a 52.5% reliability.
- Analysis over the past 20 years shows an even worse average return of -0.33% and only 55% reliability.
- In the last decade, September’s returns dropped to -1.2%, rendering the gain reliability below 50%.
- Over the past five years, September has led to declines of -2.2%, with only 20% reliability, indicating a severe trend towards market weakness.
An Imminent Correction?
Richard Coppleson from Bell Copper argues that the market’s trajectory suggests it is overdue for a correction. His analysis indicates that meaningful declines of 3% or more typically arise every 1.5 to 2 months, yet it has been over three months since the last significant pullback. Coppleson estimates a 75% chance of a 5% drop within the next two months.
Nonetheless, he believes any potential decline could be short-lived, with historical trends showing that corrections are often met with aggressive buying. Key factors supporting this viewpoint include:
- Anticipation of Federal Reserve rate cuts providing a boost.
- The traditional uptick in market performance from October to the year-end.
- Institutional pressures creating a rapid market rebound.
Wall Street Mirrors ASX Concerns
Seasonal weaknesses are not exclusive to the ASX, with the S&P 500 historically experiencing its worst performance in September, averaging a -1.17% decline. The second half of the month significantly amplifies this trend, making it particularly vulnerable to volatility shocks.
Faced with Multiple Challenges
Aside from seasonal trends, several pressing concerns are affecting market sentiment, including:
- Ascending long-term bond yields due to fiscal pressures, notably in the UK, where 30-year yields have risen to 5.7%.
- Growing worries regarding the independence of the Federal Reserve as political pressures mount.
- Renewed uncertainty surrounding tariffs after a US court case left previous tariffs unresolved, complicating business pricing strategies.
- Questions regarding whether the market has overreacted to potential rate cuts, as rising selling prices in August suggest a possibility of further hikes rather than cuts.
Silver Linings Exist
Despite the potential for short-term downward volatility, numerous factors suggest that any pullback could be moderate and underpinned by solid fundamentals:
- Major investment banks have observed that market positioning remains neutral, without signs of excessive euphoria.
- Analysts from Deutsche Bank report that tech and mega-cap growth stocks are positioned at 42%, significantly below historical averages that often precede major downturns.
- Goldman Sachs notes that institutional investors have already made adjustments to mitigate September’s historical weakness, reducing the immediate pressure for further selling.
- Sentiment indicators reveal a cautious market, with the AAII bull-bear spread remaining consistently negative, opening opportunities for contrarian buying.
The ASX reporting season demonstrated resilience with an 11 percentage point net beat among companies, suggesting positive earnings momentum across various sectors. Notably, growth stocks and financials exhibited robust results, indicating that a favourable environment for substantial earnings growth could materialise in FY26.
Conclusion
While short-term corrections appear likely amid heightened volatility with multiple negative catalysts, the underlying corporate fundamentals and anticipated rate cuts suggest a positive long-term outlook. Traders should pay close attention to how these factors unfold in the coming weeks.
