Volatility: 'While September is bad, October is worse' historically, strategist says

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Simplify ETF CEO Paul Kim and Sam Stovall, CFRA Research Chief Investment Strategist, join Yahoo Finance Live to discuss how the markets closed on Tuesday, potential catalysts for markets, and the outlook for market volatility.

Video Transcript

Again, here is your closing bell.

[MUSIC PLAYING]

[BELL RINGING]

[MUSIC PLAYING]

RACHELLE AKUFFO: And that’ll do it for our first trading day of the week after the holiday. Let’s take a look at how the major indices ended the day. All three under pressure. We see the DOW there off more than half a percent. The S&P 500 down about 0.4%. And the tech heavy NASDAQ down the most by 0.74%.

Well, let’s take a closer look at the broader markets with our market panel. Let’s bring in Sam Stovall, CFRA Research Chief Investment Strategist, and Paul Kim Simplify ETF CEO. So Paul, first starting with you, how much of this has sort of the doldrums coming out of the holidays versus additional pressures with things like inflation still on the minds of investors?

PAUL KIM: I think it’s still more of the same. I think pressure is ramping up. You’re seeing geopolitics constantly pressure markets, whether it’s energy one day or semiconductors and others. So I think that constant pressure is there. And then inflation, of course, is a long running battle now. And we’re starting to see rates tick up again and financial conditions tighten.

SEANA SMITH: Sam, what do you think we should expect to see here over the coming weeks? Because this defensive setup that we’re seeing in the market today, a lot of those defensive names leading technology once again. Under pressure has been something that we have certainly seen over the last several trading days.

SAM STOVALL: You’re right, Seana. And I think that we’re going to see a lot more volatility, a lot more defensive leaning as we head toward the CPI report, but then finally the FOMC meeting later this month. So I think investors are still very concerned about the hawkishness, the aggressiveness of the Fed. We did get an ISM report today that was surprisingly strong. But on the same front, the S&P PMI report told a totally different story. So even when you’re looking at these kind of surveys, sometimes they disagree with one another. But I think that’s simply adds to the volatility.

And do you expect this, Paul, to continue throughout what is historically one of the worst performing months for the market?

PAUL KIM: Yeah, I do. You’re seeing it in all different asset classes, particularly on FX and fixed income. But really I think we’re starting to hit the limits of what policymakers can control. Money printing doesn’t solve energy shortages or supply chain problems. And so that’s sort of the problem right now is this tug of war between adequate supply and sort of the mindset of we could always print our way past problems, to now one of supply shortages and what can we solve. And is the market pricing of resources going to always get it right or do you start leaning on things like rationing and policies? And that uncertainty is starting to creep into the market more.

RACHELLE AKUFFO: So Sam, as investors try and search for direction and they sort take in some of these, as you mentioned, sort of conflicting data points. What are some of the main questions that some of your clients have for you right now?

SAM STOVALL: Well, I guess the first question is, what kind of volatility were you likely to see going forward? Well, September is bad but October is worse. Looking at the number of times that the market was up or down by 1% or more, there’s 36% more volatility in the month of October when compared with the remaining 11 months of the year.

The question also is, what about support levels? 3,900 on the S&P held today, which is a very important level. If we go to the next retracement level that’s down near 3,800 and then we go back to the June lows. So investors are getting nervous that we are, in a sense, running out of room in which the market can make a turnaround.

SEANA SMITH: Paul, what should investors be doing right now? It sounds like at least from your view over the coming weeks it might be time to de-risk your portfolio.

PAUL KIM: I agree. I think it’s a great time and the markets are still at relatively reasonable valuations to sell off and equities, in particular, it hasn’t been that dramatic. The VIX is in the mid 20s. So there’s still plenty of chance to sort of play more defense or at least prune some of the risk exposures, not try to chase yield. There’s ample yield in higher quality exposures right now. So really play a little bit of defense. It’s impossible to successfully time the market, but you could certainly think about tail risks, think about hedging your risk exposures, and really raising more cash.

And Sam your thoughts on playing defense ahead? And you mentioned September and October, which gets us to the mid-term story. And what do investors want to see? Is it divided government?

SAM STOVALL: Well, usually seeing gridlock is good for the markets. It’s posted the best return since World War II. Basically then Congress cannot not really do anything to hurt us. You know the old saying that if the opposite of pro is con, the opposite of progress is Congress. So you get a split Congress and Wall Street will tend to like that.

No question about that. They have proven that true for decades now. Sam Stovall, Paul Kim, great to see you both. Thank you.

Thanks.