There aren’t many certainties in life, but there are always a few things we can count on in September: baseball’s heated pennant races; the start of the NFL season; leaves starting to change color; and a barrage of headlines proclaiming September’s the worst month for stocks.
As ever, we’d suggest not letting the calendar drive investment decisions. It’s true September has the worst average monthly performance, but September isn’t uniformly bad—history has seen plenty of positive Septembers. Sure, volatility may very well continue, but this September could as easily be positive as negative—short-term moves are impossible to predict with any certainty. Which is just one reason why we don’t recommend trying to time them. Even if you’re out in time to miss a short-term downward move, there’s no guarantee it’s significant enough to merit the transaction costs. Or that you perfectly time re-entry to capture the full rebound.
But whatever happens in September, it won’t be driven by calendar trends or technical indicators. Forward-looking fundamentals, as always, will be key. And on that front, we see another predictable trend: headlines proclaiming September the critical, make-or-break month for the euro. (Never mind other such months have come and gone.) Some have even labeled September 12 “Judgment Day,” as that date will see a key ruling on the ESM treaty from Germany’s Constitutional Court, the European Commission’s full proposal for centralized European banking supervision and the Dutch parliamentary elections. All of which sound huge, but likely don’t decide anything—including the euro’s fate.
Take, for example, the German court. It’s not ruling on the ESM’s constitutionality, but whether to hear a case against the ESM, which would temporarily prevent German President Joachim Gauck’s signing the ESM bill. At every turn thus far, Germany’s court has supported eurozone bailout mechanisms, and earlier statements from the court suggest the justices want to back the ESM. Even if they don’t dismiss this case, the ESM doesn’t die immediately—the court will hear the arguments and rule next year. In the meantime, the EFSF is scheduled to remain until July 2013. If the ESM’s status is uncertain then, EU officials likely do what’s needed to avoid bailout funding gaps.
The bank regulatory proposals likely prove even less decisive. It seems the Commission wants to establish the regulator by January 1, 2013, give it immediate oversight of any already bailed-out bank, and have all 6,000 eurozone banks under its purview by 2014. But Germany’s finance minister has questioned the wisdom of this, arguing one body can’t effectively monitor thousands of regional institutions and should thus only supervise systemically important banks. Meanwhile, the UK has already warned it won’t be part of any efforts to establish an EU-wide supervisor, and the ECB itself has said it wouldn’t accept the role of euroregulator unless certain conditions are met. Whatever the actual proposal contains, months of politicking seem likely—as does the changing or watering down of controversial provisions.
The Dutch election may seem to have the most isolated impact, but it at least carries intrigue. A caretaker government has ruled since April, when Geert Wilders—seemingly trying to capitalize on rising anti-EU sentiment—withdrew his Freedom Party (PVV) from the ruling coalition in protest of what he viewed as Brussels-imposed spending cuts. As a result, this election has become a referendum on the Netherlands’ relationship with the EU. Former Prime Minister Mark Rutte’s People’s Party for Freedom and Democracy (VVD) and the center-left Labour Party support continued cooperation, but VVD is neck-and-neck with the Socialist Party, which wants to reclaim power from Brussels and hold a referendum on every new EU measure that might cede sovereignty. Labour and PVV, too, are in a near-tie.
Interestingly, the outcome might be similar to Greece’s elections: Parties attempt to form a coalition along pro- or anti-Brussels lines, rather than traditional ideological similarities. A Socialist/PVV coalition wouldn’t necessarily remove the Netherlands from the euro, since only Wilders favors leaving, but it could be an early indication of Europeans’ feelings about transferring more national sovereignty to Brussels. A signal of unease could raise questions for EU officials’ plans for further political or fiscal integration.
Whatever happens on these fronts, though, September 12 and the month overall likely pass without proving as pivotal as advertised. Markets may cheer some developments and fear others, but the events deemed critical for the eurozone have already been widely discussed and thus, in our view, shouldn’t be reasons for long-term growth oriented investors to sit out September.