And here comes September

Scarecrow and a yellow moon
And pretty soon a carnival on the edge of town
King harvest has surely come

-The Band

September has a deservedly bad reputation in the stock market: The average September return is -0.65%, according to this nifty calculator from And that’s just since 1950.

scarecrowOctober has a bad reputation, too — it’s the month of the 1929 stock market crash, and the 1987 crash, too. At least since 1950, however, it has been September with the worst record. October averages a 0.68% gain.

Why do stocks fall in the fall? In the 19th century, before there was a strong central bank, there was an actual reason. At harvest time, banks in agricultural areas needed more currency than usual, because that’s when the harvest came in. People who needed corn or wheat needed money to buy it from farmers.

To make sure they had plenty of cash on hand, Western and Southern banks would call in loans and investments from the east, reducing the money supply in places like New York and Boston. As the money supply in the East dwindled, interest rates would rise, making it more expensive to pay for margin loans — loans secured by stocks — and making time deposits more attractive. It was the 19th century equivalent of the Fed raising interest rates.

One of the Federal Reserve’s main functions is to make sure that regional and seasonal money demands are met, so you can’t blame farmers for a punk fall market any more. In theory, absent any monetary reason for a fall decline, September shouldn’t be any worse than December, when stocks rise an average 1.59%.

People have offered several explanations for the rotten Fall market. The most convincing is that mutual funds often have fiscal years that end in September or October, and during that time, they busily sell their bad investments, in large part because they don’t want the year-end report to reflect their bad judgement.

Another is that people come back from vacation and have tuition bills to pay. And for many of us, September seems like the real start of the new year, even if we haven’t seen the inside of a classroom in decades. It’s time to take a hard look at our portfolios and sell the investments we’ve blithely ignored in summer.

September’s tumbles may simply be random: People love to construct patterns out of random events. Most likely, though, it’s a kind of human psychology. You may love the changing colors and the crisp weather of fall, but for millions of years it has meant that dark winter is coming — not the easiest time for hairless creatures with modest night vision. Somewhere in the back of our minds, Fall means digging in, taking precautions, and worrying about the storms to come.

The problem with stop-loss orders

If you’ve ever owned a very old car, you may have experienced the giddy feeling of pressing down on the brake pedal and having it go straight to the floor. Brakes are Good Things.

modeltFor investors, one form of emergency brake is the stop-loss order. Basically, you tell your broker to sell a stock (or mutual fund) if it declines below a certain level. It’s convenient, in that you don’t have to monitor the stock all the time, and generally sensible. If your stock is down, say, 11% from where you bought it, it’s probably best to take your losses and wait for a better time to buy the stock.

So what’s the downside? Suppose you’d put in a stop-loss order for Micron at $14.50 last week. The stock closed at $14.53 yesterday. Today, however, the stock opened at $13.81. What price did you get? $13.81. A stop-loss order simply means that your broker will try to sell the stock at the best price below below your stop. If the stock gaps below your price, you get the first bid below your stop order  — in this case, $13.81.

All the more galling, of course, is that fact that Micron quickly regained its mojo, and, at this writing, is trading for $14.93.

By and large, it’s better to have a stop-loss order on a position than not. (Many companies will now let you put in a stop-loss order at a set percentage below its most recent closing high — a nice feature if you want to preserve gains). Just don’t think that it will slam on the brakes just in the nick of time.

One observation about yesterday’s selloff:  It was big, it was bad. But it was a piker compared to Black Monday in 1987, which saw the Dow fall 22.61% in a single day. Had it been of similar magnitude, we’d be contemplating a 3,723-point loss in the Dow this morning.



Cash is never trash

For nearly a year now, pundits have been describing the U.S. stock market as “the least dirty shirt in the closet,” “the least bad-looking market,” “squeakier than a bowl of mice.” Ok, they didn’t use the last one. But the general implication is stocks may be expensive, but hey — they’re not bonds and they sure aren’t cash.

cashYou may have noticed, however, that cash looks increasingly attractive this week. While you’re earning an average 0.02% a year on your money market fund, that’s generally better than losing 1% to 2% a day on your stock fund.

Think of it this way: The average large-company blend stock fund is down 4.26% the past month. If you had 30% of your portfolio in cash, and 70% in your basic large-company stock fund, you’d be down 2.98%. While no loss is good, smaller losses are always better than larger ones.

More importantly, you would have an easily accessible buying reserve for stocks that seem ridiculously cheap. Finding values is more than buying whatever’s on the new low list. But if you can find a good stock that’s selling at a 20% discount or more, then this is a good time to think about buying.

Just recently I posted a list of companies in the Standard & Poor’s 500 stock index that are selling for 20% or more below their 52-week highs. That list has only grown since then. As of yesterday, 141 stocks, or 28% of the S&P 500, were below their 52-week highs. Among the more interesting entries to the 20% discount club:

  • Asset managers. Franklin Resources is down nearly 30% from its 52-week high, and it has now been joined by Legg Mason and Genworth.
  • Luxury goods. Coach is now nearly 60% below its all-time high, and Fossil is 56.5% below its all-time high. Michael Kors is nearly half its 52-week high.
  • Railroads. Union Pacific, CSX, and Kansas City Southern are all at least 20% below their 52-week highs.

The two biggest areas that are getting clobbered are energy and technology stocks. The problems in energy are obvious: Oil is down more than 50% from its recent highs.

The problems in tech are not quite as clear, although the weakness in the Chinese market seems to be the easiest answer. But some tech stocks seem tempting at these levels: Intel sells for just 11.3 times expected earnings, and pays a 3.4% dividend, to boot. Applied Materials sells for 12.3 times expected earnings and yields 2.5%. And Sandisk sells for 12 times forward earnings and yields 2.3%. If you have the cash — and the tolerance for tech stocks — these might good places to nibble.

Reinvesting in the business

If you own a home, you know that somewhere in the basement is a sensor that’s linked to your bank account. Too much cash on hand? There goes the furnace! Getting a bit ahead? Where did that leak in the ceiling come from? Just finishing the car payments? Look, we have bats in the attic!

Chaplin_-_Modern_TimesMany of these woes can be prevented, or at least postponed, by regular maintenance. While spending $5.000 on a new roof is probably the least exciting way to spend a five large, it’s way more fun than replacing your entire kitchen after a downpour, and cheaper, too. For many companies, capital expenditures are unexciting — but good for the firm and its profits in the long run. Unfortunately, it may take Wall Street a while to get used to the notion.

In recent years, companies have been delaying reinvesting in their people and equipment, while hoarding cash and buying back shares. But this, like putting off that new roof, has its drawbacks. If you don’t pay people well, they go away.  If you don’t modernize your equipment, your product quality falls behind.

Furthermore, while capital expenditures detract from a company’s earnings in the short term, they are a powerful driver of the economy. When you start buying new forklifts, computers or delivery trucks, other companies typically see their profits rise — and they start hiring as well. It’s a virtuous cycle.

Reinvesting in capital equipment is good for a company in the long run. Nasdaq has an admittedly obscure index called the Nasdaq US CapEx Achievers Index, which tracks companies that have increased capital expenditures for three consecutive years.

Through 2014, the CapEx Achievers index has gained an average 15.99%, according to Nasdaq, vs. 15.45% annually for the S&P 500. And for the past five years ended July, CapEx Achievers have gained 119.5% vs. 91.7% for Dividend Achievers — stocks that have raised their dividends each year for 10 years or more.

Big investments in business don’t usually please investors, who often have the attention span of a gna. For example, investors punished Walmart stock Tuesday in part because the company has been increasing its investment in its U.S. stores, and raising salaries, albeit reluctantly. (The rising dollar also hurt its returns from overseas). So far this year, several of the CapEx achievers have also been clobbered:

  • Chevron: -19.6%
  • Procter & Gamble: -13.6%
  • Oracle: -10.3%
  • 3M: -6.7%

Nevertheless, capital spending does seem to be coming back into vogue. If you take out energy spending, which is in clear contraction, capital expenditures for companies in the Standard and Poor’s 500 have risen 9.4% the past 12 months.. And, says S&P, strategies to woo shareholders — buybacks and dividend increases — are set to fall slightly in the second quarter both on a quarterly basis and last 12 months.

If, in fact, companies are starting to loosen their purse strings for a bit, that’s good news for the economy. But it may also foretell a slowdown in earnings — and stock prices — in the next few quarters. But that seems like a relatively small price to pay for much-needed improvements.

The funds you probably own

For all the ink that’s been spilled about small, undiscovered mutual funds, most people simply own the ones that are in their 401(k) savings plan. And, by and large, those are very big, long-ago discovered funds.

This is not a bad thing, necessarily. Some funds, like Fidelity Contrafund or the American Funds Growth Fund of America, have gotten big because they have had good returns over time. Others, such as Fidelity Magellan, are big because they once had had good performance, but shareholders haven’t become entirely disillusioned.

So how well is your big fund doing? On average, reasonably well in this kidney stone of a market. The table below gives you the answer. Skip below the table for a few observations.

Name Ticker Morningstar Category Total return (YTD)
Vanguard Total Stock Mkt Idx Inv VTSMX  Large Blend 2.5%
Vanguard 500 Index Inv VFINX  Large Blend 2.4%
Vanguard Institutional Index I VINIX  Large Blend 2.5%
American Funds Growth Fund of Amer A AGTHX  Large Growth 6.4%
Fidelity® Contrafund® FCNTX  Large Growth 7.7%
Fidelity Spartan® 500 Index Inv FUSEX  Large Blend 2.4%
American Funds Washington Mutual A AWSHX  Large Value 0.1%
American Funds Invmt Co of Amer A AIVSX  Large Blend 1.9%
American Funds Fundamental Invs A ANCFX  Large Blend 3.3%
Vanguard Mid Cap Index I VMCIX  Mid-Cap Blend 3.9%
Dodge & Cox Stock DODGX  Large Value 0.7%
Vanguard Small Cap Index Inv NAESX  Small Blend 2.1%
Vanguard Growth Index Inv VIGRX  Large Growth 5.2%
Vanguard Windsor™ II Inv VWNFX  Large Value 1.1%
American Funds AMCAP A AMCPX  Large Growth 4.5%
T. Rowe Price Growth Stock PRGFX  Large Growth 11.6%
Vanguard PRIMECAP Inv VPMCX  Large Growth 1.5%
Vanguard Extended Market Idx Inv VEXMX  Mid-Cap Blend 2.9%
Fidelity® Low-Priced Stock FLPSX  Mid-Cap Value 4.1%
Fidelity® Growth Company FDGRX  Large Growth 8.2%
Vanguard Instl Ttl Stk Mkt Idx InstlPls VITPX  Large Blend 2.6%
Vanguard Value Index Inv VIVAX  Large Value 0.2%
American Funds American Mutual A AMRMX  Large Value -0.2%
MFS® Value A MEIAX  Large Value 2.1%
Fidelity Spartan® Total Market Idx Inv FSTMX  Large Blend 2.6%

Source: Morningstar.

So far this year, the Standard and Poor’s 500 stock index has gained 2.5%, including reinvested dividends. The 25 largest funds have gained 3.3%.

A few observations:

Growth funds have beaten value — not just this year, incidentally, but the past five. The standout in this particular table is T. Rowe Price Growth stock, a $47 billion giant that has beaten the S&P 500 for a decade and ranks in the 15th percentile or above in its category during the entire period. Its largest holdings: Amazon, Priceline and Visa, accounting for about 10% of the fund’s assets. The one drawback to the fund: Current manager Joe Fath has been at the helm for about a year and a half. (He’s been with T. Rowe since 2002.)

Value funds have been laggards. You shouldn’t be surprised by this: It’s the sixth year of a bull market and few stocks are cheap, relative to earnings. Few of the big value funds have significant cash on the sidelines: They’re paid to be fully invested, so one has to presume that managers are holding their noses and buying the cheapest stocks they can find in an expensive market.

The one exception is Fidelity Low-Priced stock, which has a cash stash of about 9%. The fund is arguably the most eclectic and diverse of the group, with 52% of its assets in U.S. stocks and 39% abroad.

By and large, you don’t have much choice when it comes to the funds in your work-sponsored retirement plan. And in most cases, you’ll get big funds with a good track record — not the best way to choose funds, but again, you don’t have much choice. But remember this: Unless you’re on the verge or retirement, it’s probably better to get the right amount of your savings in a mediocre stock fund than it is to have too much in cash or bonds.