Market and Newsletter Update
As we return from the long Labor Day weekend, the image of a school of fish is stuck in our heads. One small twitch left or right, and the full school immediately pivots to follow in that same direction. Investors were flooded over the past few days with articles that reminded us of how volatile the month of September is in the stock market. As soon as one article was published on the topic, countless others seemingly followed, hardly a sign of independent thinking.
These news articles, however, do have some merit in bringing up the topic of stock market volatility to investors' attention. There are some more practical reasons why this time of year can be more volatile than other months.
The shallow rationale some pundits might suggest is because summer has ended, and traders are now back at their desks ready to act and protect their portfolios during a seasonably weak period. At first glance, this might seem like a self-fulfilling prophecy. Everyone thinks the market is going to go down over the next month or two, so it is bound to happen. In fact, sometimes this way of thinking can backfire and turn out to be a self-defeating prophecy.
Instead, we offer three possible explanations of why markets volatility might remain more elevated than usual.
- The fiscal year for mutual funds ends on October 31st, and hence they are already thinking about harvesting tax losses before their fiscal year-end. Sometimes they will act a bit early to get rid of their losers before the September 30th reporting quarter end to ‘window dress’ and consequently it creates more volatility.
- We’ve had a recent uptick in unemployment of 0.5% over the past several months. This level of increase also typically coincides with greater stock market volatility as investors try to discern the future direction of the economy.
- In an election year, presidential politics can get confusing as both parties promise different things, yet we still really don’t know what changes will take place if one party is elected. The chart below illustrates how the Volatility Index (VIX) of the stock market typically increases 30-60 days before and after an election, in other words, right now.
Source: Bloomberg, Edward Jones
Though we never really know, sometimes it’s better to have a heads-up that turbulence might be on the horizon. These bumps just feel more tolerable if/when they come to fruition if we know in advance. And if we hit some patches of instability in the markets, we plan to remain calm, yet active, and purchase while prices are down and/or sell while prices are high. In the end we do not see any economic issues at this time that would cause us to be concerned about the overall environment and remain confident of a soft landing.
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