Equity Traders are Preparing for Prolonged Volatility. Here’s Why.

Since 1950, September has tended to be the stock market’s worst month of the year with an average loss of .57% for the S&P 500. The only other month that has posted negative returns is August with an average loss of .26%.

September of 2020 did not break the trend and posted a 3.9% loss. Was September’s weakness simply a normal corrective phase after the enormous run up of the previous five months or something more ominous? 

The S&P had rallied 64% off of the March lows and the Nasdaq a staggering 78%.  In my recent OpenMarkets Roundtable discussion with Scott Bauer, CEO of Prosper Trading , he commented that “we were set up for volatility” based on valuations and that the correction was “very healthy.” 

Tim McCourt Managing Director of Equity Products for CME Group wasn’t quite as optimistic when he commented on volatility noting that in the past “Implied volatility levels often rose into significant market peaks” similar to what happened prior to this September sell off.  Bauer also commented that although both the election and the future path of the pandemic pose significant risks, the pandemic is a more pressing concern.

The consensus from our discussion was that increased levels of volatility are probably going to stick around for a while. The stock market does not like uncertainty and appears to be surrounded by it.  The economic recovery that has been underway is obviously dependent on improving pandemic numbers and there is a growing worry that the change of seasons could be problematic.

Although all presidential elections pose market risks, they are not all created equal. This election appears to be more contentious than most and has an elevated risk of being challenged.  

Of course, the upcoming news isn’t all negative. The odds of another stimulus package being passed is growing as negotiations continue and the Federal Reserve continues on the path of extreme accommodation in response to the pandemic.  2020 has been a volatile year by all measures and stocks have not escaped. It’s doesn’t seem unreasonable to conclude that these enormous headlines should continue to cause volatility for the near future.