(Bloomberg) -- Equity bulls contending with rising coronavirus case counts and increasingly bleak economic data have something else to worry about: August.
The Cboe Volatility Index -- known as the market’s “fear gauge” -- has gone up an average of 11.7% in August over the past 15 years, more than any other month. May is a distant second, with an average 6.8% rise. Increased equity turbulence generally means stocks are struggling: The S&P 500 has dropped 0.4% in August on average since 2005.
While the past needn’t be precedent, the potential for trouble is high, as virus cases surge, foiling states’ reopening efforts and weighing on a nascent economic rebound. Meanwhile, nerves are fraying as lawmakers debate another stimulus package, with the timing unclear just days before unemployment benefits expire. Coupled with unfriendly seasonality forces and the Federal Reserve’s cautious tone, markets are at a vulnerable point, according to Scott Minerd, the chief investment officer at asset manager Guggenheim Partners.
“We’re in a particularly vulnerable time of the year for risk assets, especially equities. History shows us that in the summer, equities are more prone to a selloff,” Minerd said in a Bloomberg Television interview Wednesday. “The markets could easily get rattled from here and we could see some severe downside for stocks.”
The S&P 500 dropped as much as 1.7% Thursday before losses were trimmed. The index has surged 45% since March 23 amid a raft of stimulus measures from the Fed and Congress.
After spiking above 80 in March during the height of the virus-fueled market meltdown, the VIX has hung near 30 for the past several weeks. However, caution is building in exchange-traded fund flows. The $1.2 billion ProShares Ultra VIX Short-Term Futures ETF is on track for 6 consecutive weeks of inflows totaling $871 million.
Not everyone’s convinced August’s track record will extend. Lower realized volatility combined with the slump in turbulence that typically follows earnings season could overwhelm seasonal patterns, according to Susquehanna Financial Group LLP.
“Ultimately, a lack of catalysts combined with an exhausted investor base could feasibly result in the continuation of the low realized volatility and range-bound trading we have experienced since the middle of June,” wrote Chris Murphy, the firm’s co-head of derivatives strategy, in a note Wednesday.
©2020 Bloomberg L.P.
Advertisement