Lazy Days Coming to an End
The last few weeks of summer are traditionally a time when we see lower trading volumes and typically lower volatility, but this August has been anything but boring. Volatility has moved higher—although still historically low—as geopolitical and domestic political issues and natural disasters Hurricane Harvey and Typhoon Hato have rattled investors. In the face of these challenges, the stable performance in August illustrates the resiliency provided by a backdrop of rising earnings.
Looking to the fall, the escalating tension with North Korea and increasing geopolitical risk, fights in Washington over the debt ceiling, the budget, tax reform and other various issues; and a Federal Reserve that is normalizing monetary policy all could mean choppiness in the market, if not a sharper pullback. However, we believe any corrective phase would be within the context of the ongoing secular bull market.
The U.S. leading indicators continue to charge ahead. One of the strongest areas of the U.S. economy continues to be the labor market despite a lackluster August Labor Report. Unemployment remains low---4.4%--and jobs still continue to be added. We're also seeing wages move higher as median earnings rose 2.5% year-over-year. This points to a healthy consumer and should support continued economic growth (although it could also mean inflation begins to move higher).
Members of the Federal Open Market Committee (FOMC) have been concentrating on “financial stability" as they continue to seek to normalize rates and appear to soon begin to reduce the Federal Reserve's balance sheet. How they implement these goals will be closely watched and could increase market volatility. Of a more immediate potential threat to near-term stock market performance is the need for Congress to deal with both the budget and the debt ceiling.
The risk of a seasonal slump remains. Stocks have posted a decline, on average, in the month of September. However, the well-supported trends of rising earnings, improving global growth, and stronger trade should help limit the size of potential pullbacks and could help set the stage for the next move higher. We urge investors to remain focused on the longer-term as we enter a period where some choppier market action is likely.