September Greets Investors with Volatility - September 14, 2020

Since bottoming on March 23, the S&P 500 Index has advanced an impressive 60% through its most recent peak on September 2 (St. Louis Federal Reserve data). This includes an advance of over 7% in August, the best August in 34 years.

Aided by strength in the tech sector and the ‘stay-at-home’ companies, the Nasdaq Composite’s performance has been even more impressive: +75.7% (Yahoo Finance).

We know that when we experience significant rallies, stocks can become more susceptible to volatility and pullbacks, even if the tailwinds that supported shares remain in place.

Today, massive support from the Federal Reserve continues, and the economy is recovering. Yet, Congress has been unable to compromise on a fresh round of fiscal stimulus, and the upcoming presidential election looms in the foreground.

Further, for reasons that aren’t fully understood, September has historically been the worst month for stocks.

Since the September 2 peak, the S&P 500 is off 6.7%: September 2 – September 10 (St. Louis Fed), while the high-flying Nasdaq shed 10% in just three days (Yahoo Finance).

Some analysts blame the recent volatility on a Japanese bank that allegedly loaded up on options in tech stocks over the summer (Financial Times and the Wall Street Journal), accentuating summer’s gains and leaving the market more vulnerable to short-term volatility.

If the economy were to stall or contract in the coming months, market action, which is always difficult to forecast over short periods, could become more problematic.

Yet, the Fed has pledged to hold interest rates at low levels for a long time, and the economy continues to recover from its low point in April. Moreover, a pullback that occurs while the economic fundamentals are supportive of shares is usually viewed as healthy as it eliminates the speculative excesses that can build up.

Economic visibility remains limited and the pace of the recovery is uncertain, but further economic growth is expected in the fall.