Before this week’s North Korean missile launch, the U.S. stock market was jittery.
But it recovered from a knee-jerk reaction almost immediately, and investors now appear less concerned about a possible conflict.
With the Labor Day holiday fast approaching, the question is: What should we expect?
Before talking directly about the market, it is important to recognize that the situation in North Korea is unpredictable and something could disrupt the markets at any time. We should expect both North Korea and the U.S. to flex their muscles from time to time.
Turning our attention directly to the stock market, we are approaching a seasonal transition point. The Labor Day holiday marks the return of market leaders. After the summer months and vacations are over, the market, as represented by the Dow Jones Industrial Average
and SP 500 Index
is free to get back to normal.
Read: The Dow faces an important change to how it’s calculated
Although major market participants never actually stop paying attention even when on vacation, there is a degree of apprehension to make big moves during that time, and that is why summer volume tends to be low. Big decisions are often postponed.
However, once the summer months come to an end and the market gets back to normal, those major decisions are revisited. This is what marks this major seasonal transition in the markets.
Importantly, this general observation does not indicate direction. Instead, the observation suggests that volume levels will increase and the market will likely discount certain summer actions. Market leaders will return and take control of the stock market in a more commanding fashion.
The question then becomes: What will those decisions be?
Every year is different, but historically September is a rocky month for the stock market. Some people think October is bad, but actually September is historically the month to worry about.
There is also a host of reasons to be concerned. The inability of President Trump to pursue his agenda, geopolitical tensions, interest-rate concerns and valuation all play a role.
Also: Top executives are buying up shares of these eight companies
On the other side of the coin, there are two major reasons for investors to have a positive outlook. The European Central Bank continues to print $60 billion a month, and U.S. tax reform is likely to be addressed when Congress returns.
Outside of health care and the border wall, the stock market cares most about tax reform.
Realistically, this is probably President Trump’s most challenging issue. We should expect tension, debate and doubts throughout the process, and the process will take time. Tax reform is a massive undertaking, and the debates in September are likely to be heated.
So what should we expect in September?
My recommendation is to be defensive. The market is capable of declining measurably in that month, but given the liquidity injected by the ECB, it would be likely to bounce back. The recommendation to be defensive suggests that we do not chase the market, but instead, if it gets hit, we can buy those dips with more confidence.
In summary, do not misconstrue the market action after the North Korean threat to adequately represent the sentiment on the Street. Investors have many concerns, but the week before the Labor Day holiday is rarely a bad one. It is almost always dominated by smaller investors, who are typically net buyers, and short sellers do not like taking action ahead of extended weekends, especially this one, historically. That sets the stage for next week.
Typically, after Labor Day the market is slow for a day or two, and then things pick up again.
We are prepared for undulations when that happens.