Reason for hope as 'worst month of the year' starts off badly

The ASX 200 is off to a bad start with more pain potentially ahead.

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1) It's doom and gloom almost everywhere you look…

After a late drop on Wall Street overnight, the Australian Financial Review (AFR) this morning says: "Australian shares are poised to start the month of September sharply lower, amid further selling in New York as investors position for ever higher interest rates."

According to Mike Wilson, chief United States equity strategist and chief investment officer at Morgan Stanley, US equity investors should be braced for more pain, as indexes haven't yet hit bottom for the year.

"June probably was the low for the average stock," he said in an interview on Bloomberg Markets, but index directions are "down for at least [the] next quarter or two".

"September is usually the worst month of the year," said Wilson.

Right on cue, the S&P/ASX 200 Index (ASX: XJO) is trading almost 2% lower on Thursday.

2) Welcome to the month of September — "usually the worst month of the year" — according to Sam Stovall, chief investment strategist at CFRA in New York, as reported by Reuters.

This comes after US markets posted their weakest August performance in seven years. For the month, the S&P 500 lost 4.2% and the NASDAQ fell 4.64%.

By comparison, here in Australia, we had a decent month, with the ASX 200 index gaining 0.6% for the month as rises in resources stocks offset losses in companies like Domino's Pizza Enterprises Ltd (ASX: DMP), Bendigo and Adelaide Bank Ltd (ASX: BEN), and ASX Ltd (ASX: ASX), down 12.3%, 12.2%, and 11.1% respectively in August. 

3) It's been a decent ASX reporting season, the highlight being the dividend windfalls from mining stocks, with bumper dividends declared by the likes of BHP Group Ltd (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG), and Woodside Energy Group Ltd (ASX: WDS). 

But that might be as good as it gets for a while for the mega-cap mining stocks. Earlier this week, Bloomberg reported the iron ore price had dropped below $US100 a tonne for the first time in over five weeks on signs that the crisis in China's steel industry is worsening.

"Output in China's vast steel sector is already running well behind last year's pace as the industry reels from a property crisis that shows no signs of abating."

According to AFR, London-based Liberum Capital has a sell rating on BHP and Rio Tinto Limited (ASX: RIO) shares. It might be a case of taking the dividends and running.

4) With petrol prices through the roof, the war in Ukraine ongoing, and Woodside having tripled its interim dividend, you'd be thinking the oil price might be riding high.

Not so fast, with Bloomberg reporting oil registered its third straight monthly decline, its longest losing run in more than two years on concern that tighter monetary policy and China's economic slowdown will impact crude demand.

Add to that Europe is almost certainly careering towards a deep recession, with the best case scenario in the US being a mild recession, and the outlook for oil doesn't look so rosy. 

Add it all up, and the ASX 200 could be in for a rough few months.

5) A few choppy months will likely pale into insignificance when looked back at in five years' time.

Even the global financial crisis – the most painful period in recent history for investors – is nothing more than a blip in the long upward progression of the stock market.

And, for those who think they might sell up now and get back into the market later, once the recessionary dust has settled, a few words of caution…

  1. The stock market is not the economy. A forward looking beast, it moves in advance of recessions and recoveries. See June this year, when it looked ahead to 2023 the first interest rate cuts, despite the RBA and other central banks currently being slap bang in the middle of a hiking cycle.
  2. In order to profit from market timing, you have to get two decisions right — the selling and the buying. It's hard enough to get one right let alone two.
  3. Research from Wells Fargo suggests missing a handful of the best days over longer time periods drastically reduces the average annual return an investor could gain by simply holding on to their equity investments during market sell-offs. Disentangling the best and worst days can be difficult, since they often occur in a very tight time frame, sometimes even on consecutive trading days.

If you are invested in the stock market, you should look at it as a lifelong endeavour, not one to dip in to and out of depending on your mood, the market's mood, the economy, the government, or inflation.

6) That's not to say you can't make changes to your portfolio. In hindsight, like many others, I should have sold out of some of my loss-making tech stocks when it became apparent inflation was not going to be transitory, something that would necessitate central banks to quickly hike interest rates.

Then there are genuine investing mistakes. The very best investors only get six out of every 10 picks right. When your investing thesis turns out to be wrong, sell and move on.

In late June, I thought bombed out initial public offering (IPO) Doctor Care Anywhere Group PLC (ASX: DOC) was a bargain. The company was cashed up with no debt and growing quickly, with remote primary healthcare being on an upward trend. 

All was looking good as the Doctor Care Anywhere share price quickly soared from my 14 cents purchase price to almost double by mid-August. 

Move aside Warren Buffett, I was thinking, there's a new investing genius in the house!

A few days later, the company revealed it had experienced platform issues, accompanied by a severe shortage of United Kingdom doctors, leading not only to the departure of the CEO but an inevitable profit warning.

Naturally, Doctor Care Anywhere shares sank, and I headed for the exits as fast as I could, thankfully still pocketing a small profit, but only courtesy of a large dose of luck. Today, Doctor Care Anywhere shares trade at just 10.5 cents.

Motley Fool contributor Bruce Jackson has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Doctor Care Anywhere Group PLC. The Motley Fool Australia has positions in and has recommended Bendigo and Adelaide Bank Limited. The Motley Fool Australia has recommended Dominos Pizza Enterprises Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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