Stocks and Securities

While history isn’t always a reliable predictor, September, especially so far, doesn’t have a reassuring reputation, either. It has delivered the biggest average monthly decline in the S&P 500 — a 1% drop — for the time period of 1928-2018.

Many potential causes of volatility that worried professional investors a month ago remain in play. From the Federal Reserve to the ongoing trade negotiations to the upcoming midterm elections, here’s what investors will watch for the remainder of September.

The Federal Reserve will hold one of its eight annual meetings Sept. 25-26. Investors expect, with near certainty, that policymakers will raise interest rates by 0.25 percentage points. If they do, it will be the third increase this year.

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While a September rate increase seems already baked into the market,  the question now is: What’s next?

In June, central bankers signalled that a total of four rate increases could happen this year, but many on Wall Street aren’t yet convinced that will happen. Adding another layer of complexity: The yield curve, which plots the difference between interest rates on short-term and long-term U.S. government bonds, flattened in August to its lowest level since 2007.

Because the Fed has a more direct impact on short-term bonds, some investors worry policymakers could cause the yield curve to invert by continuing to raise interest rates. An inverted yield curve is unusual, happening when the yield on long-term Treasuries is lower than that of short-term Treasuries. But an inverted curve has preceded every U.S. recession in the past 60 years, according to research from the Federal Reserve Bank of San Francisco.

Uncertainty surrounding the Fed’s next steps is just one factor putting the market on edge. The other? The U.S. midterm elections on Nov. 6, which could shake up the composition of Congress — and rattle the market. That’s generally something that has happened each midterm election year, so investors have to be aware and be cautious.

Fed Rate HikesThese potential sources of volatility serve as a good reminder that diversification can reduce portfolio risk. We recommend investors stay broadly diversified with allocations across U.S. stocks of all sizes and different fixed-income related assets.

While there are some well-hyped reasons as mentioned above for investors to be cautious, we point to one that we believe has been overlooked: Copper. The broadly used commodity fell into a bear market in August (defined as a decline of at least 20% from the most-recent high). The commodity historically has been a leading indicator of future economic growth.

Unquestionably the latest Trump tariff threats, along with the simmering trade battles already underway, have helped drag down prices of copper and other commodities. But the bigger story may be that last year’s synchronized global growth surge is beginning to come off its peak, with slowing in China, Europe and emerging markets.

While we are not stock “bears” yet, not foresee a full-fledged bear market anytime soon. A 10% correction, like what happened earlier this year is overdue and while painful for some, would be a nice opportunity to accumulate some of our top picks.

The more opportunistic outlook, a close above 2,916 in the S&P 500 would open the door for further gains. If we survive September and get through October unscathed that could clear the road for 3,000. But beware of the volatility to get there.


Stocks on the Radar

Regarding potential ETF plays from our ETF ALPHA segment, the ETFs on our watchlist did as follows, UWT (+14%), EDZ (-5.8%), LABU (-2.2%), INDL (+4.7%), RUSS (-16.7%) and UGAZ (-5.0%). We are also watching BRZU (-9.5%). Look at this weeks take on the ETFs we follow.

Furthermore, we encourage our readers to look at our most recent article titled “New Frontiers in Genomic Medicine” as we highlighted Bluebird BioInc. (BLUE) as our next long-term investment opportunity.

Lastly, take time to read our “Best stocks to Buy in September”, as we highlighted four of our picks for this month.