The beginning and the end of September rescued the stock market from what would have been an even worse month. As September began, an initial rally during the U.S. stock market’s first two trading days gave way to a decline. On an intraday basis, this pullback represented a ten percent decrease which pushed the market into correction territory. The mood of investors changed during the final five trading days of the month, stemming the losses and allowing the benchmark Russell 3000 to end the month at a more palatable loss of -3.6%.
What caused this month’s volatility? It’s hard to say. U.S. interest rates did not change much. Congressional fiscal stimulus talks dragged on without resolution and could be cause for pessimism, but pessimism usually punishes risk. This month showed something opposite. Small cap stocks, which are typically more volatile, outperformed large cap stocks during the sell-off. A second wave of COVID-19 presented itself in Europe, but European stocks performed several percentage points better than U.S. stocks during the correction. The U.S. presidential election drew closer, but the end of September saw stocks rise. Sometimes the stock market moves in mysterious ways.
September’s volatility did right some of the imbalances in sector performance, as previous outperformers suffered more, and previous laggards held up the best. The tech-heavy Nasdaq 100 index, a top performing benchmark this year, suffered an intra-month 12.6% decline. Foreign stocks from developed countries, which are still down about 6% this year, only declined 4.5% during the same period. Emerging market stocks, global small cap stocks, and U.S. value stocks have all underperformed the S&P 500 this year but managed to beat it by two-to-five percentage points during the correction.
These disparities provide a helpful reminder. It is easy to become impatient with poorly performing categories of stocks and be tempted into shedding them, but doing so introduces the risk of overconcentration. History shows us that relative performance between sectors is cyclical, and market leadership rotates constantly. In an environment where global equity markets are driven by big gains in a handful of stocks, maintaining a balanced portfolio greatly improves risk control.
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