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September is the cruellest month
It may only be curious coincidence, but the durability and reliability of the September Curse is striking. Since 1929, US stock prices have declined in September on average by more than in any other month - down by 1.2 per cent, compared with a gain of 0.6 per cent for all months of the year. And, in case you were wondering, that's not because the average of all those 80 Septembers has been driven lower by one or two horrendously bad months. There's something puzzlingly consistent about September's slide, in fact. In the 30 years between 1970 and 2000, for example, September was the worst-performing month of the year in each of the first two decades and the third-worst month in the last. Analysts have never really come up with a convincing explanation for Black September Syndrome. So there's always hope. But as this one begins, the omens are not good. Hurricane Gustav is, as I write, still barrelling over the Gulf of Mexico, threatening to halt, for at least a while, as much as 20 per cent of all American oil refinery activity and possibly delivering Katrina-type infrastructure damage along the Gulf Coast. Even if the damage is contained this time, the much bigger factor weighing on markets this month will be the still fragile state of the US economy. Equity prices surged last week after unexpected news that the economy had grown at an annual rate of 3.3 per cent in the second quarter. For an economy supposedly on the brink of depression, that was a pretty startling number. If it is not necessarily too good to be true, however, it is almost certainly too good to last. It was elevated by two main factors. Consumption stayed high, in large part thanks to the effects of the Government's tax rebate cheques. They won't be coming back. The other big positive element was a huge improvement in the external balance, as the economy enjoyed the fading benefits of the dollar's previous weakness and the strength of global demand. In the past month, the dollar seems to have turned the corner. Initially, that will help the current account through higher prices for American exports and lower prices for imports, but soon demand will adjust and in relatively short order the effect on the external account will be negative. Worse, the global demand that was propping up US activity is fading. In Europe the eurozone has stalled completely and Britain faces, according to the Chancellor, the worst economic environment in 60 years (this is what is known in the business as a gaffe, by the way, properly defined as a sudden and unwelcome expression of the truth, a brief sunbeam of honesty piercing the cloud cover of deceit and dissembling). Japan is probably in recession, too. In any case, we know already that the third quarter of 2008 is almost certain to be grim. Inflation-adjusted retail spending fell by 0.4per cent in July, one of the biggest falls since September 11, 2001. Unless there is a dramatic recovery in August and September, consumption is on course for its first quarterly fall since the end of 1991. Investment is also weak. Real durable goods orders declined in July by the largest monthly amount since 2002. All that suggests a weak and probably negative third quarter, even if there is some help from the external side. Beyond that, the economic outlook remains cloudy. The good news is that the inflation threat seems to be retreating, as energy and food prices fall and the dollar strengthens. This should keep the Federal Reserve on the sidelines for the foreseeable future. A real, sustained recovery still requires a clear upturn in two areas: housing and financial markets. On housing, the news is mixed. Or let me put it as statisticians might and say that the second derivative has gone negative: the pace of declines in house prices has slowed, from 25 per cent in February to 10 per cent in June, according to the latest Case-Shiller index. But the number of unsold homes remains high. And the price-to-rent ratio of the housing stock suggests that, if historical averages are to reassert themselves, we may be only halfway through the house price fall. Then, of course, there is the financial system. In recent weeks, credit spreads have widened again and it is clearer than ever that a large part of the American financial sector requires substantial recapitalising. All this uncertainty may already be reflected in equity prices and perhaps September this year will buck its strange historical trend. But I would not count on it. And then we have October. Now, nothing bad ever happens to financial markets in October, does it? September 2, 2008 |
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For financial markets, if not for poets, September is the cruellest month.