That said, investors may still want to exercise caution this September, but for a different reason than seasonality: the Federal Reserve (Fed). While the potential for a September Fed hike has been well telegraphed, a rate increase next month could still be disruptive given a slowdown in the global economy and the recent drop in U.S. inflation expectations.
Indeed, the drop in inflation expectations is particularly worrisome. U.S. 10-year inflation expectations (derived from the Treasury Inflation Protected Securities (TIPS) market) are at 1.6 percent, near January lows and down more than 50 bps from a year ago, according to Bloomberg data. Historically, the impact of a Fed hike has been partly a function of whether or not real interest rates were rising. In an environment in which nominal rates are going up due to the Fed, but inflation expectations are falling, real rates would be rising sharply, albeit from a low level. In the past, based on a BlackRock analysis, this combination has been associated with lower returns.
Investors should pay less attention to the calendar and more to the probability of a September rate hike and changes in inflation expectations. These two data points are likely to prove more important in determining whether we get a September swoon than the time of the year.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.