BlackRock chief investment strategist Russ Koesterich warns that investors should consider taking a more defensive stance in September as market volatility may rise again.
Koesterich notes that volatility has been muted in recent weeks, aided by signs of modest economic recovery and low inflation in parts of the globe such as the US – although he does not expect this to last into September.
The strategist points out that September tends to be the worst month of the year for stocks when the history of the Dow Jones Industrial Average is examined. This ”September swoon phenomenon”, he adds, can be seen in the UK, Germany and Japan as well as the US.
Furthermore, he suggests that “anxiety” of a possible tapering of the Federal Reserve’s $85bn-a-month bond-buying programme is likely to start up ahead of its September meeting, while the ongoing debate over the US budget will add to volatility.
Also, he expects Europe to re-emerge as a source of volatility during the month once Germany completes its federal elections and discussions on how to engineer a lasting end to the region’s debt crisis return to the headlines.
Koesterich says: “How should investors position their portfolios ahead of a probable volatility uptick next month? In preparation for a possible September swoon, I advocate being more defensive going into the fall.
“In particular, I would consider lightening up on parts of the market that look particularly extended year-to-date such as US small caps and US retailers.”
The strategist also recommends that investors consider allocating to minimum volatility funds, mega-cap companies or international dividend firms to help soften the impact of volatility on their portfolios.