Green Day’s song When September Ends is apropos for the stock market situation. Historically over the past 50 years, September is the only month of the year that has an average negative return and this 2023 was no exception. The market had a nice run-up from the October 2022 lows to late July 2023, but has corrected downward in August and September with a majority of the pain coming in the past month.
Fall weather in Wisconsin is hard to beat, and September delivered some awesome days, so I really didn’t want to sleep through the month. I just wanted to not watch stock prices. The fix: my wife and I took our very first cruise. We started in Iceland and then England. Unfortunately missed Ireland as the seas were too rough for a safe docking. Next, two stops in Portugal and three in Spain and finished up by spending a couple extra days in Barcelona. Wonderful trip and a great alternative to making stock picks.
About the song. When September Ends was written by Green Day lead singer Billie Joe Armstrong about his father, who died of cancer on September 1, 1982. At his father's funeral, Billie cried, ran home and locked himself in his room. When his mother got home and knocked on the door to Billie's room, Billie simply said, "Wake me up when September ends," hence the title.
Didn’t mean to get too dark, but the performance table is pretty dark too. See below.
Portfolio Update - As of the End of September
The month of September lived up to its reputation of being rough on stocks as the S&P 500 Index lost -4.9% while the NASDAQ was down -5.8%. Since the 2023 highs in late July, the indexes have corrected by about -7% by end of September. Since October 2022 lows, the indexes had moved up +32% and +53%, respectively by mid-July.
The largest contributor to the decline => increasing interest rates. The 10-year yield has moved up a full percentage point from 3.75% in mid-July to 4.75% today. Higher rates adversely affect stock prices, especially companies that need to raise capital such as the small innovative companies with little revenue and no profits. For instance, the small cap Russell 2000 has underperformed falling over -11% since the July high.
Another number that has been impactful to the market as of late is the price of oil. In mid-July the price was about $74 per barrel but that has quickly run up to almost $94 by the end of September. Higher oil prices contribute to higher cost and inflation rates making it harder for businesses to make money, unless you are an oil and gas company.
The Big 7 (Apple, Microsoft, Google, Amazon, Meta, Tesla and Nvidia) have created nearly 100% of the positive returns in the S&P 500 this year (up +11.7% YTD) as the equal-weighted S&P 500 index has a return of +0.31% YTD. These big tech companies have plenty of cash in the coffers, so interest rates aren’t impacting their profits (well, maybe to the upside since there cash is earning higher interest) and oil prices also are not as important to software/tech companies. Plus, each of them continues to grow at a significant pace.
What are you doing with your investments?
Keeping investments in money market funds earning 5% or more without the risk of stock market.
Dollar-cost averaging into market indexes. Monthly (and daily) gyrations of the market don’t matter.
Determined to beat the market by picking individual companies to outperform.
Sticking with the big guys where all the money is being made.
Picking the small or mid-sized companies that will outperform in the long-term.
Invest? I’m spending all my children’s inheritance.
Whatever your strategy, I wish you luck. Hopefully my banter in this newsletter gives you a different perspective to inform your own strategy.
What the Chart Says
After a trend, it is normal for a counter trend reaction. Nothing goes straight up nor straight down. The daily chart on the S&P 500 below shows the price action for the past two years. Even though there was a 27.6% decline from January 2022 to October 2022, there were two major bear market rallies - one in March/April (+13%) and another in July/August (+19%). Since October, the market is having its third bull market correction - the first in December of 2022 (-9%), then February/March 2023 (-9%), and now in August/September (-9%).
Is the current correction done? Corrections usually happen in three waves as in the A-B-C in the chart. The target for many corrections is a retracement of 0.382 (or 0.5 or 0.618). We hit the 0.382 right at 4,200 on October 4th. It is also just below the bottom of the trend channel in yellow. If price can pop back into the channel, we could rally back to 4,600. If the channel serves as resistance and price drops, the next lower target for the S&P would be around the 4,050 range. Lower targets, if it gets really ugly, would be 3,919 (the 0.618) and 3,808 (the mid-March low).
As I’m finishing this edition up on Friday, October 6th (sorry for being late on the publishing this month), the non-farm payroll report at 7:30am could lead price in one direction or another as we are at a precarious position. I can hope that the correction is done, but feel it is 50/50 at this point. Good luck!
Clean Energy Portfolios
Our clean energy portfolios really took a beating. The Green Edge equal-weighted universe portfolio plummeted over 20% in the month. Only six of the 37 stocks had positive returns and there was some impressive negative price action (see the chart below of the clean energy ex-SPAC companies).
Why do these innovative companies in the clean energy sector have so much trouble keeping their head above water and stock prices high? These all came public during at the height of valuations. The private equity and venture capital companies were able to create this liquidity event and collect the appreciation of their investment.
The public market gave these companies publicity, credibility, and an avenue to raise significant capital to turbo charge their operations, or continued R&D, to the next level. But many were still too early stage for public markets and likely would have been better off staying privately owned until they had more traction with products and services.
This is why I have said that investing in these (ex) SPAC stocks was like retail was given the chance to invest like a VC (venture capitalist). These stocks would be very risky, many would fail, but a couple would be home runs and make the returns of the portfolio over a 5-to-10-year period. We are in year 3 and it has been ugly, but the winners will emerge.
One of the biggest killers to the stock price is dilution. This is where the company issues more stock to raise capital making your share of stock worth a lower percentage of the company.
I just read an article titled “What the FOAK?” by CTVC (Climate Tech Venture Capital). FOAK stands for First-of-a-Kind, as in first of a kind product. The problem with developing an innovative, first-of-a-kind product is that it is hard to raise capital. Very few people want to invest in FOAK technology. But to battle the problem of climate change and reach net zero, our industry needs FOAK things to be developed, tested, proved out, and expanded.
The thing is FOAK isn’t just about products. It can also be a new, untested business model, unique engineering challenges, broader development risk, and adoption readiness level.
Many of the clean energy companies that came public through SPACs are in the FOAK type business or “early-of-a-kind” (maybe not first, but still not proven). The challenges these companies face is significant. The public stock market doesn’t like to invest with these kinds of challenges hanging over a company’s head.
However, I still believe that there will be some big winners over the next few years and the successful efforts will scale and be successful investments. In the meantime, we watch the quarterly reports and information coming from our investments to determine whether they are hitting milestones and if they have enough cash in hand to get to the promised land.
Until next time.
Efficiently Yours,
D.T.