This Week’s Blogger: Scott D. Heins, CFP®, IAG Chief Investment Officer
Will we have a stock market hiccup in September?
According to LPL Research, since 1928 September is historically the weakest month of the year for U.S. large cap stocks – rising only 43.8% of the time. And this September certainly has a number of potential volatility-inducing challenges.
First, we are overdue for a 5% or greater pullback. While in our view stock prices are more reasonable than earlier this year (see last week’s blog), large cap U.S. stocks have not had a 5% correction since the Brexit vote in late June 2016. It is highly unusual for the stock market to climb upward this long without a single 5% setback.
Second, Congress is facing deadlines that impact our credit worthiness and government functionality. The federal government is likely to reach its debt limit in early to mid-October. If Congress does not approve a higher limit by the end of September some bills, creditors, or benefits could go unpaid. Compounding this issue, the government’s fiscal year ends on September 30 and there is almost no chance a new budget will be in place by that time.
Strange as it may seem, the devastating impact of Hurricane Harvey and the potential threat of Hurricane Irma could push Congress to solve both the debt limit and budget problems in a more timely fashion. Emergency needs tend to overwhelm political gamesmanship.
Third, North Korea will be celebrating its Day of Foundation of the Republic on September 9. In most years this would not be a holiday of note. However, with tensions running high and North Korea’s desire to reinforce its credibility as a threat, a show of military capabilities of some sort on this date is more likely this year.
September could prove to be a volatile month for short-term trades. For long-term investors with a Portfolio GPS designed to further their personal goals, one month’s volatility can be taken in stride.
Just two trading days into September IAG’s Market Mood Meter© tells us that traders are Startled. Trend strength is at 67% (32 points out of 48), Momentum strength is at 25% (12 out of 48 points), and volatility expectations have risen over the last three days.
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Market Mood Meter© Trend strength is determined using S&P 500 Index daily moving averages (DMAs) (8-21, 13-34, 21-55, 34-89, 55-144 and 89-233) to determine whether the short-term DMA value is higher than the longer-term DMA value. A daily moving average is the average price of the index over the indicated number of days. Trend is either Positive (8 points) if the short-term DMA is higher, Negative (0 points) if the short-term DMA is lower or Transitioning (4 points). A trend is Transitioning if the difference between the shorter DMA and longer DMA is between -.34% and +.34% of the shorter DMA. Maximum is 48 points when all trends are Positive.
Market Mood Meter© Momentum strength is determined using the same S&P 500 Index DMAs to determine whether trends are getting stronger or weaker calculated by dividing the difference between the shorter DMA and longer DMA by the shorter DMA. Momentum must be directional – rising or falling -- for 5 consecutive trading days to be Gaining (8 points) or Losing (0 points), otherwise momentum is considered Transitioning (4 points). Maximum is 48 points when all momentum is Positive.