Look Out! September headwinds are looming…

Published: Monday, 26 Aug 2013 | 11:35 AM ET
By: Patti Domm | CNBC Executive News Editor | CNBC.com


The head winds for stocks are expected to strengthen in September, as a series of major events could make for much stormier markets.

September is historically the worst month for stocks, but this year, the calendar is a minefield for markets. From the Federal Reserve’s midmonth meeting to German elections, Japanese tax changes and U.S. budget debates, there’s a long list of potential catalysts for pain. Add to that the selloff in emerging markets and rising military tensions with Syria.

There is also the question of whether the economy will really accelerate, or whether there are cracks showing up in the housing recovery. July’s durable goods, down 7.3 percent, also showed a worrisome trend Monday. Much of the stock market’s gains this year were based on the view of a second half rebound, and now tracking GDP for this quarter fell to just under 2 percent on the outlook for core capital goods shipments, according to Barclays.

The Dow, on average, has been down about 1 percent in September, and so far this month, it’s down about 3 percent, its worst monthly performance in more than a year. Depending how September plays out, rates could also be a problem for stocks, with some strategists expecting to see the 10-year Treasury yield touch 3 percent or even higher before the month is over. That in turn could push mortgage rates even higher.

The first big hurdle for markets is the August employment report, on Sept. 6, a report that could dictate the Fed’s decision on whether it will announce a reduction in quantitative easing. Economists are divided on when the Fed will start to pare down QE—its $85-billion-a-month bond purchases—but some believe it will be September.

“People are reluctant to take big positions right now. They’re more likely to lighten more risk,” Chandler said. “Take your summer vacation because after Labor Day, it ends very quickly.”

But September will also bring clarity to an issue of major concern to the markets for the past several months, and that is when exactly the Fed will begin slowing its bond purchases, something it has said it hopes to do by year end. The Fed meets Sept. 17-18, so volatility is expected to increase around that event.

“The main source of uncertainty since May has been, ‘Is the Fed going to taper?’ ” said Binky Chadha, Deutsche Bank chief global strategist and head of asset allocation. “Uncertainty should be resolved. We think they’re going to do it. You’re going to see some uncertainty leaving.”

September markets also have history against them, with the Dow down 60 percent of the time since 1950. “September is usually not a good month for equities, so there are the seasonal issues. Given the volatility in the first half, net net, September is not going to be great, but October, November and December should be good,” he said.

Fed ahead

Bond yields have been moving higher ahead of the Fed’s September meeting, and just as there is disagreement in the market about when the Fed will taper, there’s a range of opinions on how much it will reduce its bond purchases. Fed officials have said they would like to begin cutting back on purchases before year end and complete bond buying by the middle of next year.

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