September Swoon Ahead?

Despite stocks’ strong recent performance, investors may want to exercise a bit of caution going into the fall. Russ gives two reasons why.

Strong economic data, continued mergers and acquisitions activity and stubbornly low long-term rates helped stocks advance again last week, with U.S. and global equities both finishing August significantly higher.

But despite stocks’ strong recent performance, investors may want to exercise a bit of caution going into the fall, as I write in my new weekly commentary “Two Notes of Caution as Fall Arrives.”

Here are two reasons why.

September is historically the weakest month of the year. Generally, I put little faith in seasonal biases, as most turn out to be just statistical noise. September, however, appears to be different.

Looking back at more than 100 years of U.S. market data, September stands out as the one month with a statistically significant bias, in this case a negative one. What is interesting is that this negative bias is evident in markets as far afield as Germany, the U.K. and even Japan.

Market volatility is likely to be marginally higher. While volatility fell over the course of August, the VIX’s daily average for last month was approximately 15% higher than its average over the previous three months.

To the extent strong economic data continues, one side effect is likely to be a heightened focus on an initial rate hike by the Federal Reserve (Fed). Marginally tighter monetary conditions, and market expectations of Fed policy tightening, are likely to support the trend toward somewhat higher volatility.

And another factor that may contribute to higher volatility: Investors are increasingly turning a blind eye to the escalating conflict in Ukraine. To the extent the situation there continues to deteriorate, investors are likely to pay more attention, leading to bumpier markets in the process.

To be sure, I still expect stocks to advance in 2014. A strengthening economy, low inflation and moribund yields suggest that equities can, and probably should, move higher by year end. But in the near term, negative seasonality and complacency over growing geopolitical risks suggest that investors exercise a bit of caution as the summer draws to a close.

Sources: BlackRock, Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.

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