2021 has been a good year so far for U.S. investors with the S&P 500 rising 18.6% through September 15th. The 2021 gains have also come with limited downside volatility, as the maximum pullback this year has only been 5.8% compared to the average intra-year decline of 14% since 1980.
The table below shows the top ten years that are most correlated to 2021’s year-to-date performance. The years are ranked according to their similarity with 2021 (from highest to lowest). Historically, years like 2021 have gone on to post a further 5.1% gain through year-end, with positive returns in 90% of the cases.
So, the analogs to 2021 support the old stock market adage “strength begets strength”, which we discussed in our second quarter review.
Source: Bespoke
However, we have seen many stocks stall out over the past 2-3 months and post declines thus far in September causing some investors to question whether the bull market is ending. For some perspective, it’s important to remember that pullbacks in September are not at all unusual. In fact, from a seasonal perspective, September is the only month that has averaged a decline over the past 20, 50 and 100 years as shown below.
Source: Bespoke
For some additional perspective, we have already seen seven pullbacks during 2021 ranging from 3-6% compared to the 2.4% intra-month decline so far in September. So, even compared to a low volatility year like 2021, what we are seeing in September has been fairly tame.
Most importantly, in terms of our investment process, VGA’s macro models have remained bullish throughout this year’s September weakness, deciphering the downside volatility as ‘normal’ and within the confines of a continued longer-term uptrend. This is in stark contrast to the broad-based indicator deterioration we saw during initial stock market declines in the fall of 2018 and just before the Covid Crash of last year, which alerted us to raise defensiveness due to the likelihood of much greater downside.
Given our bullish model readings, our strategies remain fully invested to participate in additional upside potential through year-end. As always, should the objective weight-of-the-evidence change, we will reposition accordingly.
We appreciate the trust you have placed in VGA to manage a portion of your wealth and are available by phone or email for any questions or comments.
Respectfully,
VGA Investment Team
Sept 2021
