The Dog Days of Summer
Volatility certainly came back strong once the summer ended as it is apt to do. The summer tends to be subdued from a volume standpoint until the “real” traders come back from their summer vacations. The funny thing is, these days the “real” traders are probably all algorithms in a computer database. Friday’s sell-off had the stink of these programs kicking into high gear. Early prognostications were that fears of the Fed raising rates sent the bond markets tumbling. Indeed, the long end of the yield curve was declining, but oddly the short end (where the Fed has the most influence) was essentially flat. If the markets were selling off due to Fed concerns then short-term rates would have been moving as well.
Over the weekend, in reviewing the actions of the market, we even saw stories that were coming out that Friday’s decline was due to unknown news that is coming out on Hillary Clinton. Pretty good insight as it was revealed the next day that she had pneumonia. Is THIS the reason behind the sell-off? Not completely but it is our belief that it has played a part. The market has been pricing in a Clinton win in November and any threat of that not coming off will be seen as a negative. Trump brings in a lot of unknowns and the market does not like that. Rest assured, volatility between now and the election will be increased.
Additionally, the markets are now questioning, and/or blaming, if monetary policy by central banks around the world are actually having the desired effects. Global bond yields seem to be bottoming. Efforts by central banks to keep them lower to spur inflation, counter deflation or effect currency valuation have been falling flat. The 10-year German bund moved into positive territory for the first time since July. Japanese yields are climbing as well as expectations are surfacing that their central bank will rethink its monetary stimulus.
The bottom line is that we do not know the true reason for the recent volatility, it seems to vary from day-to-day. The markets are dealing with lots of uncertainty and various excuses/reasons are being bandied for the up and down volatility. At this stage, we continue to expect sluggish growth here in the US and globally. We do not expect the Federal Reserve to increase rates at the September meeting and it will be in December at the earliest.
Seasonality around the September-October time period has historically been negative for the markets. So far, while recent action has sent speculation that a correction may be starting, the market is holding above its longer term averages. These will be the places to watch as we go forward and see if the bull run can be maintained.
