After a great month like August, expectations and momentum are high, and you could reasonably expect to see another great month ahead. That scenario happens, and it is certainly what we are seeing in the first days of September. But taking a detailed look at last month’s results suggests some reasons for caution. Let’s start with where the returns came from.
Improvements in the medical news. While case growth and case growth rates declined substantially over the past month, we are starting to see some flattening in the rate of improvement. So, we might not see things get much better during September. It was right about now in the last cycle, in fact, that people got confident and let their guards down—and the virus came roaring back. While that is unlikely to happen in exactly the same way this month, we do face risks around school and college reopenings, as students are unlikely to be as cautious as is needed. Even if we don’t get a third wave, things are unlikely to keep improving as much as they have. Markets have reacted to the improvements, and they will likely react if the improvements slow or stop.
Improvements in the economic news. August started with a strong jobs report and with layoffs declining. During August, though, layoffs stabilized, and the September ADP jobs report was much weaker. Markets cheered a mass return to work and will likely worry if that return slows—with signs showing that it is. Similarly, after a slowdown in consumer income and spending growth in July, data shows August was much better. With the possible slowdown in hiring, income and spending growth may weaken further, and a drop in confidence could hurt more. On the business side, confidence and investment are largely back to pre-pandemic levels, leaving little room for further improvement. Overall, much of the good news has already happened, and markets will be vulnerable to less good (or even bad) economic news.
Improvements in the markets themselves. Many high-profile stocks have spiked, indicating that investors are now fully back in the game and are willing to take risks again. Investors are increasingly moving all in, as fear of missing out on gains replaces fear of losing money. Again, this movement has been a tailwind, but it depends on the markets continuing to rise. The higher they get, the harder it is to keep going from a valuation standpoint. With valuations already at all-time highs, the market is looking stretched, and stretched valuations have historically been vulnerable to a snapback.
A historically weak month. August benefited from multiple tailwinds, resulting in one of the best Augusts on record. Those tailwinds look stretched and at risk, however. September is also historically one of the weakest months for the market, raising risks on a calendar basis, even before we consider the real possibility that the medical, economic, and market risks will reassert themselves.
Rising risks. There are also other risks, which the market has been ignoring. On the social side, there is the disorder underway in multiple cities, as well as the social effects of the pending election. On the policy side, there is the risk of no further federal stimulus. And, of course, there are risks outside the U.S., such as trade, China, and Europe. What if these risks start to get noticed again?
Volatility on the horizon? While there are no signs the markets will turn immediately, the risks are rising and will likely take effect at some point. Looking back at August, we should be grateful for all the tailwinds. But looking forward to September, we need to be aware that they won’t last forever and that the calendar is looking increasingly unfavorable. As always, keep an eye out for volatility ahead.
The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.
Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.