Stocks are heading into what's historically their worst month, but this time around they could act unexpectedly
"The S&P 500 is long overdue for a pullback," said Binky Chadha, the chief strategist at Deutsche Bank, in a note Friday, noting that it's currently in its quietest stretch since the World War II era. The S&P 500 has gone 10 months without a 3% sell-off.
This calm could be unsettled by a slew of geopolitical events. In the US, Congress must make key decisions on the debt ceiling and government funding, among others. Central banks in the US, Japan, and Eurozone all meet this month. North Korea continues to threaten the US and its neighbors with nuclear war.
Even the seasonals don't work in the market's favor, as September is historically the worst month for stocks.
And so, the ingredients for a volatile month are certainly there. But Chadha is urging levelheadedness about just how extended a drawdown to the markets can be.
"The S&P 500's typical trajectory around domestic political and geopolitical events historically has been of sharp short-lived sell-offs with the economic context eventually dominating," Chadha said.
He added:
"At the current juncture, we see little or nothing priced in for prospective policy changes so there should be little disappointment on lack of policy action. Our long standing thesis has been that the current rally has not
been driven by expectations of policy change.
The initial rally was in line with typical post-close-election rallies. Relative performance at the sector and stock levels was uncorrelated with mooted policy changes. Indeed our basket of high/low tax rate companies peaked two weeks after the election, has steadily underperformed since then and is now well below pre-election levels."
In short, market bears may be disappointed by the briefness of a sell-off related to events in September.
Chadha sees the S&P 500 ending the year at 2,600, implying another 5% leap from where it closed Friday.
The catalysts that get it there, Chadha forecast, include a third straight quarter of double-digit earnings growth, and a synchronized pickup in global economic growth.
Additionally, investors have consistently withdrawn funds from US stocks since mid-March, indicating that the are getting cautious even as the market keeps hitting new highs.
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