Since spiking earlier this summer, market volatility is now back to spring lows.
This is partly because mixed economic reports – including last week’s second-quarter gross domestic product and July non-farm payroll data – continue to suggest that the US economy is grudgingly improving.
The modest pace of the recovery, coupled with historically low inflation, suggests that the Fed has the latitude it requires for a gentle exit. As a result, stocks have been eking out gains lately, the 10-year Treasury has been stuck in the 2.5% to 2.75% range, and market volatility has decreased.
Investors, however, shouldn’t expect this calm to continue come September. While I still believe US and global equity valuations are reasonable and stocks can advance over the next year, market volatility is likely to increase in September for four reasons:
1.) September is the one month of the year when the calendar really does matter. Looking at data on the Dow Jones Industrial Average back to 1896, September has historically been the worst month of the year for stocks, with a consistent, and statistically significant, negative bias.
This September swoon phenomenon extends beyond the United States. September has also historically been the worst month of the year in a number of European markets – including Germany and the United Kingdom – and in Japan.
2.) Anxiety over Fed tapering is likely to climb as we approach the Fed’s September meeting.