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Stock Market Outlook: A September Slump?

August didn't bring the market volatility many investors anticipated, but September might — here's why market watchers think it could be a bumpy month.
Aug. 31, 2018
Investing, Investing Data, Investing Strategy, Investments
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Some investors entered August bracing for turbulence in the U.S. stock market, but the month didn’t live up to its decades-long reputation as the year’s most volatile.

It was a month of milestones, however: The current bull market became the longest in U.S. history; the S&P 500 set a new record high (finally surpassing January’s), broke its longest slog in correction territory in 60 years (recouping that 10% January-February crash) and continued a nearly 50-day streak without rising or falling at least 1%.

» Not sure how to navigate a volatile market? Find a financial advisor to help guide you

While history didn’t prove to be a reliable predictor in August, September doesn’t have a reassuring reputation, either. It has delivered the biggest average decline in the S&P 500 — a 1% drop — for 1928-2018, according to data compiled by Yardeni Research.

Many potential causes of volatility that worried professional investors a month ago remain in play. From the Federal Reserve to the ongoing trade negotiations to the upcoming midterm elections, here’s what investors will watch in September.

How many more rate hikes?

The Federal Reserve will hold one of its eight annual meetings Sept. 25-26. Investors expect, with near certainty, that policymakers will raise interest rates by 0.25 percentage points. If they do, it will be the third increase this year.

While a September rate increase seems already baked into the proverbial cake for market participants, the question now is: What’s next? “Indications for a further hike in December will be the most-watched thing in the Fed’s statement” released after the meeting, says Derek Green, a wealth advisor with Titus Wealth Management.

In June, central bankers signaled that a total of four rate increases could happen this year, but many on Wall Street aren’t yet convinced that will happen. Adding another layer of complexity: The yield curve, which plots the difference between interest rates on short-term and long-term U.S. government bonds, flattened in August to its lowest level since 2007.

Indications for a further hike in December will be the most-watched thing in the Fed’s statement.

Derek Green, wealth advisor with Titus Wealth Management

Because the Fed has a more direct impact on short-term bonds, some investors worry policymakers could cause the yield curve to invert by continuing to raise interest rates. An inverted yield curve is unusual, happening when the yield on long-term Treasurys is lower than that of short-term Treasurys. But an inverted curve has preceded every U.S. recession in the past 60 years, according to research from the Federal Reserve Bank of San Francisco.

Uncertainty surrounding the Fed’s next steps is just one factor putting investors on edge, Green says. The other? The U.S. midterm elections on Nov. 6, which could shake up the composition of Congress — and rattle the market. “That’s generally something that has happened each midterm election year, so investors have to be aware and be cautious,” he explains.

What to do: These potential sources of volatility serve as a good reminder that diversification can reduce portfolio risk. Green recommends clients stay “broadly diversified,” with allocations across U.S. stocks of all sizes and different fixed-income asset classes, including high-quality corporate, government and municipal bonds. And now may be a good time to perform a semiannual rebalancing, if you haven’t already, Green says.

» Read more: Four ways to rebalance your portfolio

New highs, old woes

The S&P 500 may be breaking records, but that’s done little to quiet naysayers. Some investors see another slump on the horizon from take-your-pick of the following reasons:

  • The potential economic impact of ongoing trade talks.
  • Valuations (what investors are willing to pay for corporate earnings) that remain high by historical standards.
  • The market’s reliance on a handful of stocks (namely technology ones) to keep the rally going.
  • Possible contagion from a sell-off in emerging-markets stocks.

“I think the market could get killed in the next couple of weeks,” says Quint Tatro, managing director at Joule Financial, a fee-only financial advisor. “The start of a sell-off may be ugly or scary,” he says, but it’s likely to be relatively short-lived and provide an opportunity for investors to buy stocks at lower prices.

» New to investing? Learn how to buy stocks

While there are some well-hyped reasons for investors to be cautious (see above), Tatro points to one he says is somewhat overlooked: copper, which fell into a bear market in August (defined as a decline of at least 20% from the most-recent high). The commodity historically has been a leading indicator of future economic growth, “and no one is talking about this,” he says.

The start of a sell-off may be ugly or scary.

Quint Tatro, managing director at Joule Financial

Even if the U.S. stock market were to fall this fall, Tatro doesn’t foresee a full-fledged bear market anytime soon. Rather, a correction of about 10% — like what happened earlier this year — is “not a bad thing,” especially for younger investors, he adds.

What to do: Don’t panic. Focus instead on what you can control, and follow these steps to prepare for a crash. Tatro advises investors to keep investing in the market — and view a sell-off as an opportunity to buy when stock prices are low.

Stock market forecast

Market volatility has all but disappeared this summer, but between February and April, the S&P 500 moved up or down at least 1% almost half of the trading days.

Some investors off Wall Street may welcome the return of such choppiness. Nearly half of adults “believe that a volatile market gives them an easy opportunity to make a profit,” according to a recent survey conducted for the American Institute of CPAs.

Of course, buying when stock prices are fluctuating can be intimidating, so focus instead on your long-term goals. The stock market has proven to be a fantastic investment historically, with the S&P 500 delivering average returns of 10% annually for buy-and-hold investors.

The market will rise and fall in the course of your investing timeline. To minimize the risk of a big shock to your portfolio, spread money across a variety of assets. And take advantage of dollar-cost averaging, which involves regularly adding money to your investments. That smoothes out your purchase price, ensuring you don’t dump all your money in the market when stock prices are at a peak or miss out investing when they’re low.

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