Welcome to September!... Historically, one of the most challenging months of the year for the stock market. After a strong first seven months, the S&P 500 declined -3.1% and the Dow Jones Industrial Average (DJIA) declined -4.4% for August, the worst monthly decline since May 2012. However, thanks to a strong January through July, both benchmark indices are still up for the year, with the S&P 500 up +14.5% and DJIA up +13.0% through August.
Several big events - mostly geo-political - could make things challenging during this historically weak month. What are the events that are causing investors to "climb a wall of worry," and should we expect more volatility over the coming weeks?
(For a quicker read, download our Market Snapshot)
Again, several geo-political events could increase market volatility over the coming weeks:
- Syrian Crisis President Obama has asked Congress to approve limited military action against Syria in retaliation for the alleged use of chemical weapons against civilians by President Bashar al-Assad. After much hemming and hawing, in spite of resistance from our allies, Obama will likely get Congressional approval for a limited strike. (Potential Market Impact: Short-term = High / Long-term = Low)
- Debt Ceiling Debate (Redux) Late last month, Treasury Secretary Jack Lew wrote House Speaker John Boehner that the U.S. will reach the limit of its borrowing authority in mid-October, by which time the Congress must raise the debt ceiling or face a government shut-down. He also said that was non-negotiable. We'll see, but the tone of the current debate is markedly different than it was two years ago, when political fractiousness caused the U.S. to lose its AAA-rating from Standard & Poor's. We think they will likely kick the can down the road...again...in spite of Lew's insistence of non-negotiability. (Potential Market Impact: Short-term = Moderate / Long-term = Low)
- Fed Tapering Maybe the best-advertised retreat from easy money policies in history could start with the Federal Open Market Committee's September 17-18 meeting, followed by Bernanke's press conference. It's the ideal venue for the lame-duck chairman to begin unwinding quantitative easing (QE) before he walks out the door next January. Many bond investors face their worst year since 1994, with long-term Treasury Bonds (as represented by iShares 20+ Year Treasury Bond ETF [TLT]) down almost -15% on the year, and down just over -22% since peaking in July 2012. So far, stocks haven't been hurt too much, but that could change. This really is a big deal, but over the short term, much of the uncertainty already may already be "priced into" the market. We don't think rising interest rates are a serious bear market risk for stocks until they rise above 3 3/4% - 4%, at the earliest. (Potential Market Impact: Short-term = Moderate / Long-term = High)
Other uncertainties loom, including the upcoming German Election on September 22 - though most expect Chancellor Angela Merkel to be re-elected. And the appointment of the new Federal Reserve Chairman is still outstanding, but most think former Treasury Secretary Larry Summers will win out over current Fed Vice Chair Janet Yellen. Summer's is considered to be more of a "hawk" thank a "dove," which may provide even more headwinds for the market.
The cyclical bull market that began on October 3, 2011 is a little "long in the tooth" - running almost 670 days. Assuming we are still in a "secular bear market," shorter-term "cyclical bull markets" with these secular cycles have historically run an average of 523 days. While we maintain that we are still in a "cyclical bull market" until proven otherwise, some of the market technicals are showing fatigue. There are a number of troublesome monthly investor sentiment indicators that tell us the cyclical bull market, which began in 2009 with a continuation after 2011, is fairly mature.
While our expectation is for more consolidation, the answer will likely first surface in how strong the market acts on any rallies. New breadth thrust signals (strong market rallies on substantial volume) amid tempered investor sentiment would suggest the worst of the decline has occurred. But narrow rallies on low volume, with a quick resumption of optimism would suggest the bull market is getting tired.
So, from a technical perspective, the trend may still be up, but only mildly so. This, combined with the geopolitical uncertainties, we think more volatility is likely around the corner.
Live well. Invest well.
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