What is the reality of stock market volatility today?
Written by: Benjamin Bimson CIMA® / BCJ Financial Group
September has historically marked the final month of traditionally weak equity returns. It is not a law, but typical trends show it to be weaker. Even our own leading indicators have dropped down to the point of showing that the market is weak and susceptible to all sorts of risks. Currently those in our tactical models should note that we are extremely close to signals that would cause us to become more conservative to preserve capital. So far, things are holding up economically, but it will not take much to push the model to become cautious. One thing that I was researching this past week was how common this is. The answer is that it occurs most years.
Why does the tactical model become sensitive? Seasonal weakness in equities is often reflected in the adage “sell in May and go away.” Although typically a flat return period in an average year, this year markets have plowed higher in that time frame, which is why our models remained nearly fully invested the entire time and remain that way for now.
Historically, the S&P 500 ETF (used in some of our models) shows us typical average monthly returns looking back through time. The red dotted line represents returns through Sept. 1, 2017. The blue is the average all returns plotted as one annual return beginning in 1980. This gives a good idea of how we compare to an “average” year for the security. The bottom half of the chart shows the average of the past 5 years returns by month and the percentage time that this would be expected.
It is very interesting to note that volatility certainly picked up in August as predicted in our late July commentary. Now, this is not all that unusual after a prolonged period of monthly gains. This year the potential of a conflict with North Korea is our chosen topic that spurred the volatility, but each year has its own unique risks. I am in no way trying diminish the reality that the current risk is very real, but the point is that every year, risk exists. It is important to understand that at the time of the writing of this, the market has not reacted in an unusual manner.
It is important for our clients and readers to understand that even though September is normally a weak month for returns, it is also normally followed by the strongest performance of the year in the fourth quarter. This is not only true for large US corporate stocks, it is also seen in the All Country World Index (ACWI) as follows.
The one caution is to note that although an “average” September has a decline in the S&P 500 ETF IVV of 0.6% and in the ACWI of 0.7%, there is a corresponding 49% of the time in September that the S&P 500 has a positive return and a 54% chance that the ACWI will have a positive return. There is quite a bit of economic momentum in the market that could easily keep the stocks producing a positive return for the short term and heading into the historically strong 4th quarter.
We want to also recognize our friends, clients and coworkers who are impacted by hurricane Harvey. We want you to know you are in our prayers and thoughts. It is always striking how fast things can change and nobody knows that more stingingly right now than those of you directly impacted.
We will continue looking at data daily and how it impacts markets. Whether it is a potential global conflict, changing economic tides, interest rates or another risk, they are all taken into consideration as we navigate this market heading into Fall.
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