Stocks Commentary

The Cruelest Months Are Upon Us

September 2018

August proved to be nothing short of outstanding for investors in domestic equities as the S&P 500, Nasdaq Composite, and Russell 2000 each hit a series of successive all-time highs in the weeks leading up to month-end. All told, the S&P 500 rose 3% during the month, while the Russell 2000 returned 4.2% and the Nasdaq Composite jumped 5.7%, propelled higher by a 6.7% surge out of the information technology sector. While information technology (IT) was yet again the standout performer, market breadth was quite encouraging during the month, with the consumer discretionary and health care sectors joining IT in outperforming the broader S&P 500. The energy sector was the big loser, down 3.8%, followed by lackluster gains out of consumer staples and financial services. The industrial sector finally showed some signs of life during the month, led by a resurgence in transportation stocks, specifically airlines, but the sector as a whole underperformed the broader market during the month and trails the S&P 500 by over 7% year-to-date. With domestic stocks at or near all-time highs, what are some pitfalls to be cognizant of as we shift from summer into fall?

In the short-term, the potentially potent cocktail of seasonality combined with trader positioning is worth monitoring. Historically, September and October have been the two most volatile months for S&P 500 returns, and with mid-term elections taking place in November, catalysts for a spike in volatility and a pullback in equity prices could materialize. Traders could be forced to hedge 2018’s gains via the purchase of put options as subdued volatility over the past few months appears to have yet again lulled some into a false sense of confidence, akin to what we experienced in early February. Speculators had been carrying significant short positions in traditional safe-haven assets, i.e. Treasury bonds and gold, although this has reversed course to some degree since the end of August as buyers of Treasuries have stepped in amid emerging market instability and contagion concerns. Should September and October hold true to form, a flight to safety might necessitate short covering in Treasuries, etc., leading to lower yields and a downdraft in stocks as traders’ unload equity positions to get liquid and meet margin calls.

Prolonged negotiations erupting into an all-out trade war could significantly impact global growth and earnings expectations. However, with a trade agreement in place with Mexico and with progress made toward a deal with Canada, waning optimism surrounding trade deals with Europe and China has reversed course of late. Chinese equity declines have led billionaire power players there to lobby President Xi Jinping to go back to the bargaining table and strike a deal with the U.S. The U.S. dollar has since pulled back from mid-August highs on positive trade chatter and due to China’s central bank stepping in to support the yuan at the end of August after a precipitous drop on the heels of U.S. tariffs on Chinese goods. By stepping in to support the yuan, Beijing showed that it isn’t actively attempting to weaken its currency, a major point of contention for President Trump. The move highlights willingness on the part of the Chinese to work on a trade deal, although Xi appears to be in no hurry to negotiate prior to November’s mid-term elections.

Source: Bloomberg


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