September has been a busy month.
There were the attacks on Saudi Arabia’s oil infrastructure earlier this month that sent the energy sector reeling. Then there were major developments ahead of the next round of negotiations between the U.S. and China to try to end the trade war. And then this week’s Ukraine scandal that erupted into an impeachment inquiry for President Donald Trump.
However, for the market, September has felt like a breather after a volatile August for stocks.
Last month, the VIX surged to its highest level of the year as the trade war escalated and fears about a global recession gained steam. On August 14, the Dow saw its worst day of the year as the yield curve between the 2- and 10-year Treasury notes inverted for the first time since 2007. Such an inversion has historically been a reliable indicator of an impending recession, and last month’s inversion sent stocks on a wild ride.
But if you’re hoping for the relative calm of September to continue into October, Goldman Sachs has some bad news for you.
According to Goldman, despite the market being just shy of returning to its record highs, we could be in for a rocky month ahead as historically, volatility has been 25% higher on average since 1928.
For each major benchmark, the firm says big price swings have been seen every October for the past 30 years, with the technology and health care sectors seeing the most volatility.
“We believe high October volatility is more than just a coincidence,” John Marshall, equity derivatives strategist at Goldman, wrote in a note to clients. “We believe it is a critical period for many investors and companies that manage performance to calendar year-end.”
In September, the Cboe Volatility Index—commonly known as the VIX or “fear gauge,” it measures the implied volatility of U.S. stocks—has been tame as trade tensions between the U.S. and China have calmed down and Treasury yields have recovered after their extreme lows in August.
But as the next earnings season kicks off, the firm says things could become chaotic again as investor sentiment shifts.
“Such pressures boost volumes and volatility as investors observe earnings reports, analyst days and management gives guidance for the following year,” Marshall wrote. “Not only are earnings day moves rising relative to average daily moves, but October tends to be the quarter with the largest absolute earnings day moves for U.S. stocks.”