Sleepy summer may give way to freaky fall

[September 03, 2016]  By Saqib Iqbal Ahmed

NEW YORK (Reuters) - The dog days of summer have lived up to their sleepy reputation this year as far as U.S. stocks are concerned, but market gyrations could soon pick up as a traditionally more volatile time of year looms.

The S&P 500 index's 1-month realized volatility, a measure of market choppiness over the past 30 days, is stuck near all-time lows, according to Thomson Reuters data. Even the early-summer jolt from the surprise Brexit vote proved short-lived, and the S&P has not seen a 1-percent price move, up or down, on any day since early July.

Yet all that could change quickly given the abundance of catalysts that can rattle markets in the weeks ahead, market watchers said.

"If you look at September on average, it's a bad month," said Brad McMillan, Chief Investment Officer for Commonwealth Financial Network.

September ranks as the worst month for stocks, according to the Stock Traders Almanac, producing an average price return for the S&P 500 of negative 0.5 percent. Its reputation has grown more ominous since the financial crisis, because it was the month when Lehman Brothers went under in 2008, nearly taking the U.S. financial system down with it.

"There is a real good chance that the low volatility that we have seen in August hasn't just disappeared, it's just been storing up for September," he said.

While the holiday-shortened week itself is light on U.S. economic data, there is no dearth of trigger events in the near-term that could rile markets.

The possibility of a U.S. interest rate hike at the Federal Open Market Committee's September meeting, stretched stock market valuations, volatile oil prices, the fallout from Britain's decision to exit the European Union, and political risks linked to the U.S. presidential election are just some of the factors that could upset the volatility cart, analysts said.

"August, September and October, this is the wrong time of the year historically to get really aggressive, particularly given all these uncertainties on the horizon," said Phil Orlando, chief equity market strategist at Federated Investors in New York.

"If two or three of these go wrong … given stretched valuation levels, we could very easily see a little bit of a pullback."

Stock market valuations are stretched – the forward price-to-earnings ratio of the S&P is currently above 17, compared with its long-term average of about 15 - leaving the market susceptible to a negative shock.

The Fed's policy meeting on September 20-21 is by far the biggest near-term risk to stock market calm as investors continue to struggle to determine the path of interest rate hikes by the central bank.

A trader works on the floor of the New York Stock Exchange (NYSE) shortly after the opening bell in New York, U.S., August 30, 2016. REUTERS/Lucas Jackson

While U.S. employment growth slowed more than expected in August, hurting the case for a interest rate hike this month, the data is not weak enough to push a September rate hike completely off the table. "Any bad news could be an excuse to reduce positions and take a little bit of money off the table," Mark Watkins, regional investment strategist at the Private Client Reserve at U.S. Bank, said.

Investors will be dealing with a relatively light week on the economic front, with reports on the services sector likely to be the highlight.

The U.S. Presidential election is another factor that could stir up volatility as Election Day nears.

"Wall Street starts taking the elections seriously on Tuesday," said JJ Kinahan, chief market strategist at TD Ameritrade in Chicago.

"For the press, they've been great fodder for the fact that TV has to report twenty-four hours a day. But in general, Wall Street hasn’t taken it seriously yet, so we all get down to business next week.

The first presidential debate on Sept. 26 could help shed light on both candidates' policies.

"With everyone on one side of the boat, pricing a Hillary presidency, if suddenly something should happen such that people think that maybe Trump has a chance, that certainly increases volatility," Orlando said.
 

"That could be one of those things that triggers near-term a hiccup in the markets," he said.

(Reporting by Saqib Iqbal Ahmed and Chuck Mikolajczak; Editing by Dan Burns and Nick Zieminski)

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