Preparing for the Fall

Preparing for the Fall…Both Pumpkin Spice and Stock Market Volatility.

I love fall. Pumpkin Spiced everything, cool air, camping and hiking weather…I also love the return of some likely volatility in the stock market. When volatility is the friend of the long-term investor, being prepared to take advantage of it is what we at Members’ Wealth do.

First some background…

By looking at nearly 100 years of monthly U.S. large cap stock data from 1926-2022[i], several historical tendencies stand out.

• September has been one of the worst-performing months of the year, in fact, with a net negative return, although outright declines have occurred only one-half of the time.
  
  
• October has been one of the more volatile months as measured by annualized standard deviation, featuring a larger-than-normal number of volatility episodes, including financial ‘crashes’ (1929 and 1987 stand out as the most well-known).
  
  
• November and December, after the typical autumn turmoil, have historically been among the highest returning months of the year, as has the fourth quarter generally—a tendency often referred to as the ‘Santa Claus rally.’

Of course, no single year falls in line with these historical averages perfectly, making this no lay-up in terms of easy profits, but the long-term tendencies are interesting, though not always winning trades, and expectations can sometimes become self-fulfilling as they are often brought up in the news media this time of year to add additional drama. 

Where do we stand this year?

After a stretch of strong returns since the lows of Oct. 2022 (of over 25% for the S&P 500), it is also worth a reminder about periodic financial market drawdowns. Over the long haul, stocks have tended to move at a pace of several steps forward and one step back. It is easy to become complacent during bull market stretches, and downturns can be subtle. As we have seen historically, -5% pullbacks have tended to occur several times a year (as we saw in early August, followed by a reversal again back up and another 5% dip). Specifically, since World War II, ‘corrections’ of -10% have tended to happen about once every 1-2 years. Moves of -15% have tended to be seen about every 3-5 years, and -20% ‘bear markets’ have occurred once every 6-7 years or so, similar to the frequency of recessions. Now the good news…For investors having stayed the course, recoveries from downturns have tended to be sharply better in the immediate 12- and 24-month periods after a market trough.

I have to challenge that -20% every 6-7 years. Witness… 2018 (-20%), 2020 (-34%), and 2022 (-25%). That’s more like 3 out of 5 in recent years. Beware the averages…Therefore, it would not be surprising to us at Members’ Wealth for investors to be afflicted with the behavioral finance malady of ‘recency bias[ii],’ making one more sensitive to recent volatility versus long-term averages, and hesitant to become too optimistic. 

So as you warm up with your fall drink of choice – Pumpkin Spice Latte anyone?.. prepare for those higher than average volatility months, but do not let the last four years of higher than normal market drawdowns, deflect you from your long-term plan and from being opportunistic, if some drawdowns do present themselves. We at Members’ Wealth are here to help….

[i] FocusPoint Solutions calculations based on monthly Morningstar and Ibbotson data. 

[ii] Recency bias is the tendency to overemphasize the importance of recent experiences or the latest information we possess when estimating future events. Recency bias often misleads us to believe that recent events can give us an indication of how the future will unfold.

About the Author – Dane Czaplicki, CFA®

Dane Czaplicki is CEO of Members’ Wealth, a boutique wealth management firm that offers a comprehensive approach to serving individuals, families, business owners, and institutions. The firm’s goal is to preserve and grow its clients’ wealth to endure over time, while thoughtfully evolving its strategy to suit an ever-changing world. With over 20 years of wealth management experience, Dane and the Members' Wealth team thrive on bringing clarity and confidence to clients' unique situations. He believes everyone needs sound financial advice from someone whose interests are aligned with theirs, and is determined to put service before all else.

Dane received his MBA from The Wharton School of Business at the University of Pennsylvania and his bachelor’s degree from Bloomsburg University. Outside work, he enjoys spending time with his wife and kids, hiking and camping, reading, running, and playing with his dog. To learn more about Dane, connect with him on LinkedIn.

To get in touch with the Members’ Wealth team today, I invite you to email info@memberswealthllc.com or call (267) 367-5453. 

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