It turns out that volatility is a two-way street.
After August was a Wall Street downer, the consensus turned gloomy for this month, too. Yet September has been the best month for the stock market, thus far, in an up and down year.
Of course, there are still four trading days left.
But so far, a series of breezes has conspired to steadily lift prices: The S&P 500 index was up a gusty 9 percent.
“I think it’s a sign,” said Lisa Brown, wealth adviser at Brightworth, a Norcross firm that provides investment counsel. “Do we think there’ll be a continued rally for the next six months? No. But we do see a lot of positive opportunities there.”
Historically, September has often proven a bad month for stocks. No one knows for sure why, but there are theories.
For instance, if a company early in the year has been overly rosy in its profit projections, the truth ought to be emerging by Labor Day, which leads to falling stock prices.
It is also a point at which the holiday season outlook becomes clearer. In bad years, that can fuel pessimism.
This September has been different — for several reasons.
Many companies are hitting and beating their earnings estimates, said Rex Macey, Atlanta-based chief investment officer for Wilmington Trust Investment Management.
Moreover, trading seems to hinge lately on economic news, and there has been less talk about a slide back into recession, he said.
“The perception of risk has diminished — although I don’t think it’s gone away,” Macey said. “We are in a period of slow, anemic growth, but it is growth.”
But is the stock market telling us that the growth will continue?
Stocks are often seen as signals — flawed and imperfect but sincere — about the direction of the broader economy. Purchase of bonds is partly a bet on what interest rates will be, while purchase of stocks is a bet on how well a company will perform — both in business and in its stock price.
“That doesn’t mean that the markets are good forecasters,” said Dorsey Farr, principal in Atlanta-based French Wolf & Farr, an investment advisory firm. “It doesn’t mean that we price things right.”
Many market trends have sometimes foreshadowed shifts in the economy. For instance, the stock market started falling before the start of the 2001 recession.
September’s buy-fest would seem to predict solid growth. Yet pessimism wasn’t confined to just the 4.5 percent fall in August. The market has fallen in three other months this year with the sharpest drop — 8 percent — coming in May.
Volatility may reflect the dramatically different views of many investors. Some foresee runaway inflation, others fear a prolonged battle with its polar opposite.
The schizoid result has been optimism in late winter, gloom in spring, a smiley face in July turned upside down in August. And now it has flipped again.
It’s about psychology, said Farr. “Wild swings in prices are not necessarily reflective of wild swings in fundamentals. On some level, it’s simply a reflection of sentiment.”
The most crucial feeling is confidence, argued Jim Hansberger, Atlanta-based managing director at the Hansberger Group of Morgan Stanley Smith Barney.
There was plenty of confidence Friday. At the end of the trading day, the Dow Jones Industrial Average was 198 points; the Nasdaq climbed 54 points; and the S&P 500 had risen 24 points.
Investors buy when they are confident; they sell when they are afraid, Hansberger said. “I believe the appetite for risk goes to zero when you have little confidence, and rises when people have more confidence.”
Yet September’s swing upward also reflects some hard-nosed calculations: With inflation so low, bonds are not paying much in the way of yields.
Neither are bank accounts. Some money has apparently sprinted out of the low-yield zone and gone looking for better returns in the stock market.
Many investors have also come to expect that Congress will eventually extend the Bush era tax cuts and have been encouraged to think that the Federal Reserve is considering more action to boost growth.
But, in looking at the stock market as it alternately sags and spurts, it is easy to see big themes and forget that the trading is all about buying low, selling high and making money, said Brightworth’s Brown.
Peaks create valleys, and vice versa, she said.
“When the price of a good strong, company dips, it’s a buying opportunity,” Brown said. “The long-term investor looks at it that way. Things are on sale.”
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