3.) Europe is likely to re-emerge as a source of volatility as Germany holds an important federal election in September.
4.) The US budget debate will heat up again as Congress needs to pass a continuing budget resolution before the fiscal year ends on September 30th. Not surprisingly, Congress has made little progress to-date.
To be sure, September did not play to script last year and September’s negative seasonal bias is much less pronounced in years when the market is up year-to-date, as clearly is the case this year. But last year’s September rally had a lot to do with more-than-expected support from the Fed, something we aren’t likely to see this year.
How should investors position their portfolios ahead of a probable volatility uptick next month? As I write in my latest weekly commentary, in preparation for a possible September swoon, I advocate being more defensive going into the fall. In particular, I would consider lightening up on parts of the market that look particularly extended year-to-date such as US small caps and US retailers.
In addition, investors may want to consider investments that offer the potential for downside protection, including minimum volatility funds like the iShares MSCI ACWI Index Fund (ACWI) ; mega-cap companies, accessible through funds such as the iShares S&P Global 100 Index Fund (IOO); and international dividend firms, which can be accessed through funds like the BlackRock Global Dividend Income Fund (BABDX).
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.
The author is long IOO.