Wall Street Braces for Volatility: September Concerns, the Fed & Tariffs

Wall Street Braces for Volatility in September

With Wall Street's summer calm ending after the Labor Day holiday, investors are bracing for a period of increased volatility. September is historically the worst month for US stocks, and with concerns about the Federal Reserve's independence and uncertainty surrounding President Trump's tariffs, both the stock and bond markets face headwinds.

Valuation Concerns and Economic Slowdown

Market participants have long been concerned about the frothy valuations of stocks and corporate bonds, not to mention the piling up signs of a US economic slowdown this summer. Adding to the mix is the escalating feud between Trump and the Fed, raising fears that strong-arming of the central bank could destabilize the US bond market.

Pent-Up Anxiety and Volatility Erupt

Those pent-up anxieties finally erupted on Tuesday, reignited by fresh doubts about the legality of Trump's tariffs that surfaced over the holiday weekend. This led to both stocks and bonds falling, with many in the market anticipating more turbulence before Friday's key jobs report.

Warnings of 'Bond Vigilantes'

Seth Hickle, portfolio manager at Mindset Wealth Management, pointed to the uncertainty surrounding the tariff issues as a trigger for the current risk-off sentiment. He expressed concern that 'the bond vigilantes' would awaken and cause some turmoil in the bond market, due to the possibility of the US having to return some of the tariff revenue overseas. 'Bond vigilantes' are bond investors who punish bad government policies by selling government bonds.

Volatility Index Spikes and Treasury Yields Rise

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) touched its highest level in over four weeks, while the S&P 500 fell 0.7% on Tuesday. Amidst a global bond selloff, long-term US Treasury yields spiked. The benchmark 10-year Treasury yield (which rises when bond prices fall) jumped nearly 5 basis points to 4.269%, while the 30-year Treasury yield rose to its highest level since mid-July.

Impact of Rising Yields on Stocks and the Dollar

Higher Treasury yields can hurt stocks as bond returns become more attractive. Investors often see the level of the 10-year Treasury yield at around 4.5% as a level where appetite for stocks begins to waver. Additionally, rising Treasury yields tend to support the US dollar, which bounced on Tuesday from its recent weakness.

Court Rulings' Impact on Tariffs

Mark Luschini, chief investment strategist at Janney Montgomery Scott, noted that the spike in the 30-year Treasury yield to nearly 5% is 'putting some pressure on the market'. He added that court rulings on Trump's tariffs 'put some consternation out there as to what that might mean with respect to the collection of tariff revenue and helping to curtail our budget deficit'.

Seasonal Effects and Risk-Off Shift

Seasonal weakness may be partly due to investors clearing out portfolios after returning from summer vacations, while also making tax and other adjustments before year-end. According to the Stock Trader's Almanac, September has been the worst-performing month for the S&P 500 over the past 35 years, falling by an average of 0.8% during that period. According to the almanac, the index fell in 18 of those 35 Septembers, making it the only month where it declined more often than it rose during that period.

Capital Reallocation and Gold as a Safe Haven

Christian Hoffmann, head of fixed income and portfolio manager at Thornburg Investment Management, stated that the risk-off move this month was largely expected, and that large debt issuances in the credit market on Tuesday added to the government debt selloff as investors reallocated funds into corporate bonds. 'Our inclination all summer has been to reduce risk as valuations have been getting tighter'.

Gold and Cryptocurrencies as Safe Havens

Investors are also looking for alternative assets that can help protect portfolios in a volatile market. Gold prices rose on Tuesday to near an all-time high of around $3540 per ounce. Aakash Doshi, head of gold strategy at State Street Global Advisors, noted that 'Gold and Bitcoin have both gone up this year, not one without the other'. He pointed out that both assets – one historically seen as a hedge and the other as a high-volatility strategy – align on dollar issues. 'Both offer alternatives to fiat currency and de-dollarization'.