The summertime doldrums are extreme this year. Wall Street typically goes quiet after the end of the second-quarter earnings season as summer vacations and a lack of trading action dulls the excitement through Labor Day. Once school restarts, volume returns to normal.
But this year is off the charts.
And that has a growing number of market watchers concerned this could be a dangerous sign of investor complacency heading into what’s likely to be a very turbulent autumn. Catalysts include what’s shaping up to be the most contentious presidential election in decades, worry about possible interest rate hikes from the Federal Reserve and confirmation (or not) of the eagerly awaited second-half bounce-back in GDP growth and corporate profitability.
How quiet is it?
According to Jason Goepfert at SentimenTrader, in the 10 days through Aug. 22, the S&P 500 did not move more than 0.75 percent from its highest to lowest close despite flirting with new record highs. And this is the second time that’s happened over the past month. Goepfert believes over the next couple of weeks, “we’ll witness among the lowest 30-day ranges in the S&P 500’s history.”
Another concern: Volume suggests traders are more focused on stocks that are falling.
In the past, this trend (quiet trading, downside volume) meant stocks tended to struggle. Since 1950, low volatility near new highs has resulted in negative short-term returns, with stocks sporting a negative average return over the month that followed.
The doldrums could possibly end as soon as Friday, when Federal Reserve Chair Janet Yellen makes her eagerly awaited speech to the Jackson Hole symposium in Wyoming. Despite last week’s release of dovish July Fed meeting minutes, a number of Fed speakers since then have taken a decidedly hawkish stance even though inflation remains tepid and a second-half rebound in corporate earnings and GDP growth remains unproven.
That has bumped up expectations for a December rate hike somewhat. But given the Fed’s long history of “crying wolf” on rate hikes , don’t hold your breath. And with the central bank’s tendency to go quiet ahead of presidential elections, Yellen will surely be vague and slightly dovish in Jackson Hole.
The result could be a nice rally into the Labor Day weekend next week, if fears of a surprise September rate hike get taken off the table. Other positive catalysts include the likely flurry of rumors heading into a meeting of oil producers next month. Late Tuesday saw reports that Iran will indeed attend the powwow in Algiers after earlier indications it wouldn’t.
After that, the bears could emerge from hibernation ahead of the first presidential debate and the coming seasonal headwinds October typically brings.