September and October have historically been the two most volatile months of the year when it comes to market movement. “I have no idea why, but every year our phone rings off the hook right after Labor Day, and that's the way it's been for 30 years,” Tim Holsworth, president of AHP Financial Services told Investment News. He also said in past years most of these calls have centered on questions about the markets and clients’ account balances.
The Coming Storm
Holsworth isn’t the only financial advisor who is bracing for a barrage of client inquiries. Ed Butowsky, managing partner at Chapwood Capital Investment Management, told Investment News that, “I fully expect there to be a lot more volatility throughout the rest of the year, and it has everything to do with slowing global economic growth. If you're over allocated to equities, get out of this friggin' market,” he said. “The GDP growth forecasts are being lowered, and earnings forecasts have already been lowered, and are going to be lowered further. The argument that there's nowhere to go except equities is wrong, and you should be out of the advice business if that's your philosophy. There isn't one serious fact supporting the market going higher, and I think you'd be a fool not to be getting ready for a bad market.” (For more, see: Volatility: How Advisors Can Help Clients Stomach It.)
He isn’t recommending that clients move into cash, but to rebalance positions that have grown disproportionately. He estimates that the market is currently about 10% overbought right now, and that the wave of revisions in corporate earnings could double that number.
Despite the fact that September and October have historically been the two most volatile months for the markets dating back to 1928, the actual returns posted in September have averaged out to a 1% loss, while October’s averages actually come out to a gain of 40 basis points. But a combination of factors, such as the upcoming election, the chance that the Federal Reserve may raise rates and global economic turmoil could make this September even wilder than usual.
Leon LaBrecque, managing partner and chief executive officer at wealth management firm LJPR Financial Advisors, said in an interview with Investment News that, “This presidential election is the mother of all uncertainties. I think a lot of people took a nap in August, but they will be paying attention in September. I think there will be a lot of things going on, and there will be lots of volatility.” However, he has only been rebalancing his clients’ portfolios in select areas. He does not foresee that a rate hike will affect the markets that much, but is more concerned about the possible effects of a rise in oil prices. (For related reading, see: Stock Market Risk: Wagging the Tails.)
Other advisors see the upcoming volatility as an opportunity. Mark Reitz, of Reitz Capital Advisors LLC said to Investment News, “I'm looking for a reverse in this trend, similar to the second half of 2015 and the same reaction to the next rate hike as January 2016. By no means is it time to bet against the U.S. economy and stocks yet. Instead, this is the perfect opportunity to book profits, rebalance, reduce beta and risk in portfolios.”
There may reason for optimism, however. According to BofA Merrill Lynch Global Research, in August, its Sell Side Indicator — a measure of Wall Street's bullishness on stocks — fell from 50.8 to 49.6, its lowest level in over three years. The indicator remains firmly in "buy" territory after triggering a contrarian buy signal in April. While sentiment has improved significantly off of the 2012 bottom — when this indicator reached an all-time low of 43.9 — today's sentiment levels are well below last summer's high of 54.0 and where they were at the market lows of March 2009. The sell side's growing bearishness stands in contrast to signs of increasingly bullish buy side positioning. (For more, see: How Advisors Can Make the Most Out of Volatility.)
With the S&P 500's indicated dividend yield currently above 2%, that implies a 12-month price return of 20% and a 12-month value of 2,604. Historically, its indicator has been this low or lower. Total returns over the subsequent 12 months have been positive 100% of the time, with median 12-month returns of +27%.
The Bottom Line
Time will tell how the markets perform in the next 60 days. If they behave according to the historical norm, then we may be in for some major ups and downs. (For more, see: Using Historical Volatility to Gauge Future Risk.)