Market Update 2nd September 2024

September Surprises

Goodness me. It’s September. This has once again managed to catch me off guard.

With hindsight, the signs were there. We go around the sun at the same rate every year, and we count the days in August up to 31 every time. The only possible excuse for any confusion is that, based on the name alone, one would expect September to follow June, not August. But I have come to terms with the fact September, October, November and December are not the seventh, eighth, ninth and tenth months of the year, despite what your old Latin teacher would assert.

Anyway, I digress. September is here, and I’m all for it. If you’re like me and you like your sport, it’s a great month. Cricket is still just about with us, football and rugby are back underway, the US Open is being contested at Flushing Meadows. There is even something for the MAMILs (middle aged men in lycra), with the tour of Britain rolling around, and we’ve got the added bonus of the Paralympics this year too.

For investors though, perhaps the most significant sporting event of the month is the St Leger festival: subject of the old ‘sell in May, come back on St Leger’s Day’ adage.

Rather than having any investment merit, most of the strength in that particular saying comes from the fact it rhymes. Being out of the market for the summer over the years would occasionally have paid off, but really it’s time in the markets that counts. The most important thing is to focus on sensible investments, which can be held for the long-term. Finding them is the challenge.

In theory it is easy. Identify businesses that have sustainable advantages, with good financials and sensible valuations. Buy them, and enjoy the returns. Similarly, if you can back fund managers with good processes and give them time to deliver returns, one can be hopeful of positive results. The problem is there are many tripwires.

The first, and arguably most dangerous, is often laid by the investor themselves. Individual investors are often their own worst enemies. The timing of purchases and sales can be influenced by all sorts of factors that really shouldn’t come into it. Not least the noise parts of the press are prone to emit while dressing up a hiccup as a full blown crisis. Shifting copies is the aim of the game, and sensationalist headlines sell.

Other distractions come from the macro. GDP, industrial production, inflation and consumer confidence all have the power to move the dial. Fair enough. They are important. However, busying oneself with every single datapoint is counterproductive. We need to keep the main thing the main thing. The most important data comes from the market itself. I’d much sooner listen to what George Weston and Simon Wolfson, who have a combined 42 years of experience heading up ABF (which owns Primark) and Next, have to say about the retail market than any boffin at the ONS.

This has led me, after some meandering, to a concluding point. The indications we’ve had out of the last results season were largely encouraging. In the US, positive earnings surprises, ie actual results beating expectations, were slightly more common than usual this quarter. In the earnings calls offered with these results, the topic of recession came up far less frequently than has been the case in the last few years. Whether through buybacks or dividends, returns to shareholders are coming through thick and fast too.

That’s not to say that it’s plain sailing from here – but should we hit a problem, the average company is in a position of strength. On both sides of the Atlantic, leverage ratios are healthy compared to historic norms (implying robust balance sheets) and profit margins are higher too.

Of course, there are some businesses facing challenges, and there are others with plump valuations. But overall, I do not see the current market as one to be approached with trepidation, especially if we as investors are able to deploy our most potent weapons – time and patience.

George Salmon – Senior Research Analyst

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