Stocks: Sizing Up September

The month has typically been a difficult one for equitiesexcept when it's a Presidential election season

August has come and gone, and we are sorry for two reasons. First, it marks the conclusion of summer, but possibly more important, it turned out to be a pretty good month for stocks: What is there to look forward to?

The S&P 500 rose 2.6% through Aug. 28, marking the third straight August advance and the third monthly rise of the year. The large-cap benchmark had a lot of company as 8 of its 10 sectors posted increases, led by Consumer Discretionary, Information Technology, and Telecom Services. Only the Financials and Materials sectors fell during the month. What's more, two-thirds of the subindustries in the Standard & Poor's 500-stock index rose in August with Building Products, Construction Materials, and Home Improvement Retail in the lead and Consumer Electronics, Industrial REITs, and Thrifts & Mortgage Finance pulling up the rear. By the way, the best and worst performing stocks in the S&P 500 were financials, as MBIA surged 172% while Freddie Mac slumped 35%.

But now that September is upon us, is the fun over? The S&P 500 has posted its worst monthly performance in September, falling an average 0.63% since the end of World War II (vs. an average gain of 0.69% for all months) and declining 56% of the time (vs. an average 41% for all months). No matter how far back you look, whether it's 1990, 1970, 1945, or 1929, the average return has been negative. If there is a silver lining to this horrible performance, however, it is the upcoming Presidential election. Since 1944 the euphoria surrounding the elections typically spilled over on to Wall Street and helped the S&P 500 record an uncharacteristically strong 4.4% gain during election-year Septembers.

When Hurricanes Happen

Speaking of hot air, the U.S. Gulf Coast had to deal with Hurricane Gustav in early September. Historically, while hurricanes have had a major impact on headlines, they have had a minor influence on the economy's bottom line. Mainly because even though hurricanes are a national media event, their economic impact is usually regional. Indeed, during the past 100 years hurricanes have typically increased future economic growth as the localities affected by the storm repair and rebuild.

History says (but does not guarantee) that hurricanes do not typically trigger market declines, as equities are more likely driven by wider-reaching national events than localized natural disasters. In fact, the S&P 500 gained an average 3%, 4%, and 5% in the one, three, and six months after the 15 most costly Atlantic hurricanes were formed.

S&P's Equity Strategy Group maintains its recommended overweighting to the Energy sector. In addition, S&P's equity analysts continue to have positive longer-term fundamental outlooks on most sub-industries in the sector: Coal & Consumable Fuels, Integrated Oil & Gas, Drilling, and Equipment & Services, which together represent more than 75% of the sector's market value.

EPS Angst

This September analysts will be making last-minute adjustments to third-quarter S&P 500 earnings per share estimates, which S&P equity analysts see rising 4% for the first positive quarter in a year. Energy is projected to post the greatest advance at 57%, followed by gains at a percentage rate in the teens for Consumer Discretionary and Telecommunications Services. Only Financials are expected to post a decline this quarter.

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Subindustry Company Ticker S&P STARS Rank Price (8/28/08)
Biotechnology Genzyme GENZ 5 $80
Brewers Molson Coors TAP 4 $48
Coal & Consumable Fuels Peabody Energy BTU 4 $65
Fertilizers & Agr. Chem. Monsanto MON 5 $116
Health-Care Equipment Becton, Dickinson BDX 5 $103
Home Entertainment Software Electronic Arts ERTS 3 $47
HyperMarkets & Super Centers Wal-Mart WMT 4 $59
Industrial Gases Airgas ARG 5 $59
Insurance Brokers AON Corp. AOC 4 $48
Life Sciences Tools & Svcs. Covance CVD 5 $96
Oil & Gas Drilling Noble Corp. NE 5 $51
Oil & Gas E&P Swift Energy SFY 5 $48
Personal Products Avon Products AVP 3 $43
Railroads Norfolk Southern NSC 4 $71

Source: Standard & Poor's Equity Research

Before it's here, it's on the Bloomberg Terminal.