October: Get Ready for Volatility

2019 has felt like a volatile time in the markets, and we’ve asked the question: Is this volatility normal? Our conclusion: Compared to years past, stock market volatility this year has actually been pretty normal. Yet, as we head into October, it is time to get ready for the possibility of increased volatility for two reasons – historical precedence and some tensions unique to the current environment.

Historical Precedence

To understand historical precedence, it is helpful to first look at the data. Two sources are the CBOE Volatility Index, known by its ticker symbol VIX, and the calculation of volatility – what’s called standard deviation – simply using the daily returns of the S&P 500. Reviewing both sets of data to quantify monthly volatility, we see a meaningful increase in October.

Let’s consider two popular theories on historical October volatility. The first relates to summer. After enjoying the slow summer months, market participants return to work. Activity then builds up through September, peaking in October, which drives volatility higher. A second theory: During October, third quarter earnings season is in full swing. And during this third quarter earnings season, companies tend to offer revised guidance for the coming year. Revised guidance, or change, can drive volatility.

With historical precedence in mind, let’s consider some tensions unique to the current environment.

The Current Environment

Geopolitics are recently driving market behavior and emotion, so let’s consider some that may influence volatility in October.

U.S.-China Trade: The senior negotiating teams from the U.S. and China meet in October, with continued uncertainty as to when, or even if, a trade deal will get done. And typically, tensions have escalated after these recent meetings.

Brexit: October 31 is the latest deadline for the U.K. to exit the EU, but an agreement has not been finalized. Prime Minister Boris Johnson will continue to wrestle with Parliament and the EU to try to get a deal done.

Mideast Tensions: A recent drone attack on Saudi Arabia’s oil infrastructure, and the belief among many that Iran is behind the attacks, has increased Mideast tensions. October may bring further, related action from the U.S. and its allies.

Hong Kong Unrest: Protests continue, risking a deeper divide between China and pro-democracy countries.

U.S. Tariff Deadline: There may be tension between the EU and the U.S. in October, in advance of the U.S.’s self-imposed mid-November deadline to possibly set tariffs on European autos.

Japan’s Value-Added Tax (VAT): Japan’s VAT, a consumption tax, is expected to rise from 8% to 10% in October. This increase was originally planned for 2015, but Prime Minister Shinzo Abe suspended the tax hike in 2014, as the previous tax hike forced the economy into a recession.

Japan-South Korea Tensions: South Korea and Japan removed one another from their lists of preferential trade partners, increasing probability for future trade tensions between the two countries.

So, as we look forward into October, we’re getting ready. History tells us that stock market volatility will be higher. On the negative side, we’ve had the panic of 1907, the crash of 1929, and 1987’s Black Monday. On the positive side, we’ve seen strong returns in 2011 (10.9%), 2002 (8.8%), and 2015 (8.4%).

Combine this with lots of geopolitical tension, and the table is set for increased volatility. Our base case outlook is that U.S. economic growth will continue, but at a slower pace, and global economic growth will stabilize. The uncertainty related to issues like Brexit and U.S.-China trade will lead to volatility. But the question remains: positive or negative?

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Employees of Stifel, Nicolaus & Company, Incorporated or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Past performance is no guarantee of future results. Indices are unmanaged, do not reflect fees or expenses, and you cannot invest directly in an index.

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