Investment Clock insights

Seasonal rise in volatility likely to create buying opportunity

Trevor Greetham 

12 September 2016

Stocks have sold off over the last couple of days on concern that the US Federal Reserve may raise interest rates at its 21 September meeting, despite recent weakness in US business confidence. This may develop into a good buying opportunity. Stock markets are prone to shocks over the summer months and volatility tends to increase as we head into the autumn (chart 1), so this correction is not wholly unexpected. We expect the steady if unspectacular expansion in the world economy to continue, irrespective of gradual increases in US interest rates. We are looking to buy dips in the emerging markets, where stronger activity in China is a positive, and in Japan where more stimulus is on the way. That said, the current sell-off may have further to run in the short term, as our composite sentiment indicator is not yet giving a buy signal (chart 2).

Source: Datastream, Bloomberg, average seasonal volatility profile  based on VIX data since 1990

Source: RLAM Composite sentiment indicator based on short-term momentum, volatility, private investor sentiment and US director dealing

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.