Although the summer has been sleepy for US stocks, this scenario could soon change. Market movements could turn chaotic as a more volatile period of the year comes up. As per data published by Thomson Reuters, the one month realized volatility of S&P 500 index is at historical lows. This remained unaffected even by Brexit, and there was not even a one percent movement in price of the S&P, up or down, any day since the earlier part of July.
Market watchers warn that this may change fast thanks to the surfeit of catalysts which may shake markets in the coming weeks. Brad McMillan of Commonwealth Financial Network describes September as a bad month. If one goes by Stock Traders Almanac, the month of September was always a bad one. It generated an average of negative 0.1 percent in the S&P 500. September’s reputation has grown with the financial crisis as Lehman Brothers ceased to exist during this month in 2008. The American financial system nearly collapsed with it. McMillan said that there exists a good chance that the volatility of August has not disappeared, but has been stored up for September.
US economic data on the first week of September is scarce. There are no, however, shortage of trigger events which could happen to disrupt the markets. There are good reasons for this. A hike in the interest rates in the United States, due to be decided at the September meeting of Federal Open Market Committee, stretched the stock market valuations. The factors of BREXIT, volatile oil prices and political risks connected to US presidential election could be simply a few of the many factors which could result in volatility.
Similar views were echoed by Phil Orlando of New York headquartered Federated Investors. He said that the months of October, September and August are the wrong months to be aggressive, given the uncertainties in the horizon. Orlando is the company’s chief strategiest of equity markets in the company. He added that a pullback could be observed if even two of them go wrong.
It is true that valuations in the stock market are stretched. The S&Ps forward PE ratio is presently above 17. in contrast with long term average of approximately 15. This leaves the market vulnerable to negative shocks. The policy meeting of the Federal Reserve scheduled to be held on September 20-21 is the biggest risk to stock market calm in the near term.