In election years August tends to deliver for investors—but September and October not so much

August 31, 2020, 12:30 PM UTC

After a blistering August which saw new highs in the S&P 500, including a rare “perfect week,” much of Wall Street is wondering: What now?

The outlook, at least according to some analysts, may be less cheery.

LPL’s Ryan Detrick notes that the August preceding an election is typically a strong month for investors, while September and October tend to falter slightly (although any pullbacks are typically “very minuscule on average,” Detrick says, as LPL’s chart shows).

For investors “the biggest thing is there’s going to be a pullback eventually. People need to prepare; we’ve been so spoiled,” Detrick tells Fortune, suggesting investors take advantage of that pullback by looking for buying opportunities when the market dips. “Embrace the volatility and pullbacks,” he says.

Meanwhile, the VIX, or fear index, has also been sending out some warning signals of late that all is not well in the markets, rising overall in the past week alongside the markets. That typically doesn’t happen “unless the VIX is signaling a reversal to the downside,” Randy Frederick, Charles Schwab’s vice president of trading and derivatives, recently told Fortune.

But this fall in particular could prove especially volatile. While August will presumably close out strong, analysts emphasize that markets have largely been buoyed by the expectation of continued stimulus from Congress and the Fed to boost the recovery out of the recession brought on by the pandemic.

The problem is that “some lawmakers are…taking some solace in the stock market, and certainly the President is,” Mark Zandi, chief economist at Moody’s Analytics, recently told Fortune. “And that is a huge error because the market is taking its cues from lawmakers, expecting them to pass a rescue package.”

Indeed, some analysts predict as much as a 10% correction if Congress doesn’t pass another stimulus bill in September, Wedbush’s Dan Ives recently told Fortune.

Meanwhile, the 2020 election may prove especially controversial, and experts are already anticipating the results could be contested. In that case, “if history is any guide, we would expect to see some initial equity market volatility as investors grapple with the resulting policy uncertainty,” Thomas McLoughlin, head of Americas fixed income at UBS Global Wealth Management, recently wrote in a note. “Markets abhor uncertainty.”

Bulls may have had a hot summer in the markets, but much of the continued rally may now be in Washington’s hands.

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