A Preview of Coming Attractions?

Key Points

  • Volatility has ramped up a bit in the traditionally-slow final weeks of summer, which could be a preview of a bumpy fall for investors.
  • Solid economic data and strong corporate earnings should allow the bull market to continue, but fiscal and monetary uncertainties present risks.
  • August narrowly avoided the first loss for global stocks this year; but underlying fundamentals still look generally positive.

Good bye and good riddance to Harvey

Rain is finally coming to an end but the impact, both human and economic, will go on for far longer. We are confident that the area around Houston will rebound, and have been heartened by the outpouring seen from the region and the entire country; but at this point it’s too early to determine the ultimate economic impact. Generally, what’s occurred in the past has been some distortions in economic data in the near term—e.g., we could see a tick up in jobless claims coming from the region as businesses are unable to reopen. However, we are likely to see an uptick in economic activity in general over the next six months or so as the rebuilding efforts kick into high gear. The Wall Street Journal reported that over 500,000 vehicles may need to be replaced, which could lead to an uptick in auto sales. Overall, the losses and subsequent stimuli may roughly even out and have little impact on long-term growth. Importantly, we don’t suggest investors try to trade around potential hurricane effects.

Lazy days coming to an end

The last few weeks of summer are traditionally a time when most of Wall Street heads for the beach, Congress is in recess, and the only event of any consequence is a bunch of central bankers pausing from their fishing to pontificate in Jackson Hole, Wyoming. Indeed we've seen lower trading volume over the past few weeks, but August has been anything but boring. While we don't want to read too much in to late summer action, recent action may be a preview of what investors will see this fall.

Volatility has moved higher—albeit still historically low—as geopolitical and domestic political issues have rattled investors at times.

Volatility has seen increased action

Volatility has seen increased action

Source: FactSet, Chicago Board Options Exchange. As of Aug. 28, 2017.

And this was before Labor Day, after which Congress comes back into session and European officials get back to work. One positive effect of the recent uptick in volatility is subdued investor sentiment based on most traditional indexes, which reduces the likelihood of a potentially-dangerous "melt-up."

Looking to the fall, fights in Washington over the debt ceiling, the budget, tax reform, and various other issues; a Federal Reserve that is normalizing monetary policy; and plenty of geopolitical risk could mean some continued choppiness in the market, if not a sharper pullback. However, we believe any corrective phase would be within the context of an ongoing secular bull market and could help to set the stage for the next move higher.