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The S&P 500 has a history of underperforming in September.
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Volatility increases throughout the month as traders reposition their portfolios.
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Several market-moving events could make this September especially unique.
As August closes the summer season, the S&P 500 Index Soon he could be taking his own vacation.
On average, September has been the worst month for the benchmark index since 1928. Not only do stocks typically underperform, but it's also not unusual for the market to end the month with a negative return.
According CME Group Data Since last year, the S&P 500 has lost ground in 55% of Septembers over the past century. More recently, the index has fallen for the past four years. German Bank aggregate.
A big culprit is higher trading volume as Wall Street gets back to work after Labor Day.
As more traders take vacations during the summer months, trading activity tends to lag, resulting in stronger market performance amid lower trading volumes.
SoFi's Liz Young Thomas noted that monthly trading volume for the S&P 500 averages 15.2 billion shares between June and August, but when investors return to their desks in September, volume surges to 17.2 billion shares.
“People are coming back in and starting to trade again. There's more activity in the market, which can lead to volatility,” the chief investment strategist told Business Insider, adding: “It's natural for people to look at portfolios and say, 'I'm slightly overweight Mag Seven, or slightly overweight large-cap stocks, or just overweight stocks in general.'”
September experiences some of the most volatile swings of the year, and 2% moves in either direction are a norm for the S&P 500, he said. While volatility continues through the fall, September stands out in that downward swings far outweigh upward momentum, he said.
What to expect this year?
A number of market-moving events could make this September unique.
For example, all eyes are on the Federal Reserve's monetary policy meeting on September 18. Interest rate cuts are widely expected, a move generally seen as positive for the bullish rally.
However, according to Adam Turnquist of LPL Financial, this could change depending on the upcoming August jobs report due out on September 6.
If the jobs data is weaker than expected, the Fed could seek deeper rate cuts, which would be an acknowledgement of the weakening economy.
“Should we get a little bit better economic data next week, the soft landing narrative gains a little bit more momentum and we potentially break the losing streak we've seen over the last few years in September,” chief technical strategist Adam Turnquist told BI, but noted that downside risk appears more likely.
Beyond September, electoral nervousness can only prolong seasonal volatility.
SoFi's Young Thomas noted that volatility peaks in mid-October during election years, not late September.
However, this is often followed by a reaction of relief once the results are known, he said.
How to prepare
Portfolios should not be rebalanced due to seasonal instabilities, each expert told BI: that is difficult to forecast and is not a long-term fundamental.
But for those looking ahead to the next few months, Young Thomas suggested investors pay attention to how the trading environment could soon change.
“You have to think about it and think, 'Well, what typically works well during a steepening yield curve, with falling yields and a falling dollar?'” he said, referring to the three outcomes that a rate cut implies.
In this context, dividend-paying stocks could be profitable, he said. As yields fall, Treasuries will lose their luster, prompting investors to look for other sources of income. Dividend-paying stocks may benefit, he said, adding that they are typically concentrated in utilities and commodities.
Meanwhile, a weaker dollar could boost healthcare, as a falling dollar should boost medical exports, he said. Increased trade activity would also benefit the aerospace and defense sectors.
Turnquist also noted that investors might do well to buy during the seasonal dip.
“Buying at the September or October lows has been a very good trade,” he said. “In October, things start to improve and then you get this November, December and year-end rally, with typically very high average returns and high positivity rates for those months.”
Read the original article at Business information