Market Observations in September

On August 2nd the Dow Jones Index closed above the 22,000 mark for the very first time.  During the month the index traded in a range of 2.6% from high to low and ended the month close to where it opened.  As stock prices rise, risk increases and no can deny that prices are high right now.

However, investors have become complacent in the environment since the Presidential election last November.  Investor sentiment is measured by the Volatility Index (VIX) which is at its lowest reading in 27 years.  A low reading means investors believe the current conditions will continue and all is calm in the markets.  A high reading means fear controls investors resulting in lots of price swings and ups and downs.  Another way to say it, a low reading means little concern about risk and a high reading means investors are fearful.

The pressure to raise interest rates continues at the Federal Reserve.  We think the board may be more likely to start selling US Treasuries before it raises interest rates again.   The FOMC’s bond portfolio expanded exponentially from $800 billion in 2007 to over $4 trillion today as a result of the quantitative easing programs.  The US Treasury’s buying from 2008 to 2013 created demand and drove bond prices up and interest rates down.  Selling could create supply that may have the opposite result.  Reducing the amount of its own bonds on the books will need to be handled in a very measured way over several years.

In addition to the continuing concern of rising interest rates, the market faced other pressures this summer.  The Debt Ceiling looms over Congress as it returns from the August break.  The market will watch to see how that pressing matter is resolved.  Investors don’t like a game of chicken between the legislative and executive branches.

Tax reform is all talk and no action so far.  The market really wants to see some action here.  The gains achieved since the election were based partly on the anticipation of tax reform.

In August the world faced the escalation of relations with North Korea.  In the most tense moments the market pulled back slightly but for the most part took this in stride.  If the relationship continues to escalate, it could have a negative impact on the market.

Then in the last week of August, the US faced the unprecedented devastation in Texas.  The economic impact has yet to be revealed but forecasts indicate it will be the worst natural disaster in the history of the US and the costliest.  Gas prices are rising at the pumps with news of 15 refineries being shut down, but so far the stock market remains strong.

Considering all the headwinds, the market was actually quite resilient this summer.  What comes through clearly is that the market looks forward.  The GDP numbers for the 2nd quarter were revised up from 2% to 3%.  That is the best pace in over two years.  Hopefully that will continue for the remainder of this year.  Consumer confidence rose in August and corporate profits are up.  It appears that market makers believe we have a good economy ahead and they are investing to that end.  A fact that is not widely publicized is that the new administration is boosting the economy by overhauling the regulatory environment.   This is positive for the stock market.

As always with the market, there are many caveats and there is the known and the unknown.  As we head into September we know we are facing one of the historically worst market months.  There are always exceptions but it is important to watch and be prepared for whatever this September brings.


Written by Connie C. Guelich, CFP, AEP, CLU, ChFC.  This represents our view at the time of this writing and is subject to change.  This is not intended to be personal investment advice.   If you would like to discuss your own account, please don’t hesitate to call us.  We are here to help and welcome your call.

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