Quick note: This commentary was largely written by Cali Byrn, a member of the investment committee and a future money manager under Victoria Bogner’s leadership.  We’re excited and grateful for her contributions to the team!

In our last market commentary, we noted how June 20th was likely the low of the year and we anticipated higher prices by year-end.  We also noted that the market doesn’t move in a straight line.

We’re experiencing that now.  The last three weeks have been negative for the major indices and CNBC hasn’t missed the opportunity to strike fear into everyone’s hearts.  Headlines of recession, market crash, “get out while you still can” and the like are hyping up the pullback all for more clicks.

So let’s zoom out our lens and look at the bigger picture instead of the picture the media is painting. It all started after the market finished in positive territory for four consecutive weeks. It appeared like this rally would carry us through the end of the year. Everything seemed to be on the up and up. We saw inflation numbers come down as we predicted in our last commentary.  So was there a catalyst for the recent downturn we’re experiencing?

August 19th. Date doesn’t ring a bell? Well in our world, the third Friday of every month is always a significant date because of something called options expiration. Suffice it to say, it’s a week in which volatility increases and the market’s prevailing trend usually reverses.  It wasn’t surprising at all to see the market struggle that week.

In addition to that, Jerome Powell’s statement from the Fed’s annual Jackson Hole retreat jolted the market even further when he said there will be “some pain” ahead with more rate hikes than the market was anticipating.  And so, the selling has perpetuated to where we currently stand today.

Where do we go from here? In short, we still foresee the market ending higher by year end from where it is today. The market’s current price action, while not exactly what we predicted, is not as alarming as you may think. Here’s why.

Prior to Friday’s close, based on the technical and fundamental analysis we’ve observed, the most likely “worst case” scenario was a slight pullback to the 3,900 level on the S&P 500.  As you can see below, we’re pretty much there.

If the S&P 500 fails to hold this level, the next logical support for the S&P would be revisiting the low of June before ending higher for the year.  September is seasonally the weakest month of the year so volatility over the next few weeks wouldn’t be out of the ordinary.  If we do retest the June low, that will rattle many market participants and resume calls for a new leg down, but we don’t believe that’s probable.

Above is a chart that breaks down the best times of the month/year and the worst.  When seasonally evaluating the stock market going back to 1950, the worst week of any calendar month is the 19th through the 25th thanks to options expiration that we talked about already.  The worst time of year historically is July 18th – September 27th.  After we get past September, October is overall positive.  We then head on to the strongest time period of the year, October 28th to January 18th.  Sixty-two out of the last seventy-one years have ended higher with the S&P being up an average annualized 20.60%. However, the strongest time of the year is preceded by the weakest time of the year, so that’s why October is the magical month that we expect some of the gloom to lift, and that’s why we don’t think a breakdown below the June low is probable.

To sum it up, in the near term we think we’re going to experience some choppiness. We’re still predicting the market will head higher by year end because November and December are seasonally the strongest calendar months of the year. As an investor, you should stay allocated to your proper risk tolerance through the remainder of the year. However, if we see money makers running towards defensive sectors as they did back in January of this year, we’ll get defensive sooner rather than later as well.

This year hasn’t been the smoothest of rides, but remember, there has yet to be a time when the market hasn’t ultimately recovered and gone higher.  Hold onto your hats through September until we get to smoother sailing in the fourth quarter.

Disclaimers and Notes

Registered Representatives offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Advisor.   Advisory services also offered through Affinity Financial Advisors, a Registered Investment Advisor, operating as McDaniel Knutson Financial Partners. Cetera is under separate ownership from any other named entity.

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