Is Now a Good Time To Hedge The Market?

The stock market plunged in early August after a disappointing jobs report fueled concerns that the U.S. economy could be worsening. Inflation and high interest rates have continued to put pressure on consumers and businesses alike, and credit card debt and delinquencies are on the rise.

Those concerns haven’t faded, but stocks have bounced back quickly. Much like the rest of the year, the rally was driven by artificial intelligence stocks.

AMD (NASDAQ: AMD) in particular drew headlines with its recent $4.9 billion acquisition of server builder ZT systems, and tech stocks are a primary reason why the S&P 500 is up over 18% year-to-date.

Unfortunately, September is coming. The month has historically been the weakest period for the stock market, leading to a perennial global downturn that has been dubbed the September Effect. While market analysts have posited many theories for the decline, the only thing that is clear is that stocks exhibit seasonal weakness in September, on average.

In addition to economic issues and the September slump, the U.S. elections will weigh on investors’ minds as November approaches.

While the outcome of the presidential election seemed more assured a few months ago, the emergence of Kamala Harris as the opponent of Donald Trump has injected uncertainty into the race, and therefore the markets.

So is now a good time to hedge the stock market?

Do Election Years Have An Effect On The Stock Market?

The economic policies of a presidential candidate can have an effect on investors, as evidenced by former President Trump’s recent switch on crypto. While previously dismissive of digital assets, Trump’s embrace of cryptocurrencies sent bitcoin to its highest levels.

However, that was when Trump was more assured of a victory. After VIce President Harris entered the race, crypto faced selloffs, because the Democratic party has been more active in regulating crypto. It’s not immediately clear whether Harris will continue that approach.

For instance, Trump has vowed to shelve many renewable energy initiatives, so if it appears he will be elected, stocks in that sector may well experience selloffs.

Foreign policy also has an impact certain industries. Raising or lowering the tariffs on Chinese goods may well affect Chinese stocks like Alibaba or Tencent. A candidate’s stance on the wars in Ukraine and Israel may similarly affect companies with stakes in the region.

Until there is more clarity on the positions of the candidates and better insight into the probable victor, there will continue to be uncertainty in the markets.

However, while the presidential candidates’ policies matter, the down-ballot races can be just as important. If it appears a single party will control both houses of Congress and the presidency, for example, there is higher likelihood of impactful legislation being passed.

Is The September Effect Legitimate?

Before November comes September, which has historically been the worst month for the stock market–the S&P 500 has closed out the month lower than it began 52 times since 1928. Over the past 30 years, stocks have dropped 0.34% on average during the month, worse than any other month.

Some have speculated that the September Effect is tied to the return to school and the accompanying fees and tuition.

Another thesis is that August is when many companies report their Q2 results, and investors are adjusting to the information they received about the first half of the year and regrouping before they make their next move.

There is also the very real possibility that it becomes a self-fulfilling prophecy. Investors expect stocks to drop in September so they trim their portfolios and, as a result, stocks fall. Similarly, many investors “sell in May and go away” simply because that’s the way it has always been done.

Will Economic Issues In The U.S. Improve?

Unfortunately for investors, just because there is not a definitive explanation for the historical September weakness doesn’t mean it won’t occur. The biggest concern on investors’ minds is likely neither the upcoming election nor the September Effect but rather the potential for a recession in the U.S. economy.

A unexpectedly dismal jobs report in July led a massive market selloff in August. The report showed that the labor market slowed and the unemployment rate rose to 4.3%, the highest it has been since 2021.

Unemployment is a major factor in consumers ability to pay off their debts and credit card debt has continued to skyrocket throughout the year.

While there are signs that inflation could be cooling, there are also concerns that it isn’t happening fast enough for an economy that has been under the continued pressure of high interest rates. While there is certainly cause for concern about a recession, so far the U.S. economy has continued to stay above water.

Those fears could deepen if the unemployment rate continues to increase, however, though there isn’t enough data to support that conclusion yet.

What’s The Best Way To Hedge Stock Market Volatility?

For investors who believe the market is headed for a downturn, treasury and corporate bonds have been the traditional refuge against the volatility of the stock market. Other popular safe haven assets are precious metals and cash.

However, ETFs have become a popular way for investors to diversify both stock and non-stock investments. There are now ETFs that track the price of oil, foreign currencies, and even newly-launched crypto ETFs.

Is Now a Good Time To Hedge The Market?

With the stock market approaching all-time highs, now is a good time to hedge against seasonal weakness that typically surfaces in September.

The September Effect, the election year, and the persisting economic malaise are likely to weigh on the market, and those are reasons enough for some investors to move their funds elsewhere.

Still, investors should stay attuned to the market, because if a sell-off could create opportunities where the stocks of well-run companies are selling at a bargain.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.