Analysis: It was a wild August on Wall Street. Maybe next year I'll take that vacation.

  • A board above the trading floor of the New York Stock Exchange shows the closing number for the Dow Jones industrial average, Wednesday, Aug. 14, 2019. The DJIA sank 800 points after the bond market flashed a warning sign about a possible recession for the first time since 2007.

    A board above the trading floor of the New York Stock Exchange shows the closing number for the Dow Jones industrial average, Wednesday, Aug. 14, 2019. The DJIA sank 800 points after the bond market flashed a warning sign about a possible recession for the first time since 2007. (AP Photo/Richard Drew)

 
 
Posted9/8/2019 6:12 AM

If you are an investor who just lived through August, it's tough to ignore Wall Street volatility caused by an unpredictable president, a confusing bond market and a seemingly endless trade war.

Despite the confusion, U.S. stocks ended the month within 3% of historic highs after snapping a four-week losing streak.

                                                                                                                                                                                                                       
 

So maybe next year I take an August vacation, read books and get my excitement following the Washington Nationals' bat swings instead of the stock market's swings.

The lesson here -- unless you're a day trader or a reporter covering the news -- is to not get caught in the daily gyrations.

"August provided us all with a reminder of the benefits of diversification and the importance of ignoring the noise and staying invested," said Kristina Hooper, chief global market strategist at Invesco.

August is historically a touchy time for stocks, and this August was no different. But Aug. 23 delivered a new level of chaos. It doesn't get much weirder than a U.S. president referring to his Federal Reserve chairman -- one he appointed -- as an enemy of America.

"I can't imagine any market that is prepared for any president to say something so incendiary and absurd," said Michael Farr, president of Farr, Miller & Washington.

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That wasn't all that happened on that spooky Friday. President Donald Trump also announced, in a series of bombastic tweets, that he would broaden and bolster tariffs on hundreds of billions of dollars' worth of Chinese imports. Trump also demanded that American companies stop doing business with China.

The Dow Jones industrial average reacted within minutes, diving 623 points, lopping 2.37% off investor wealth. The one-day sell-off erased $825 billion from the Wilshire 5000 Total Market Index.

And that wasn't all that happened in August.

A historically reliable barometer of a recession emerged out of the bond market two weeks ago, sending panic through global markets and lopping 800 points -- or 3% -- off the Dow.

There was more: China allowed its currency to devalue. The U.S. screamed that it was unfair. The Dow dropped 767 points that day.

There were other discordant signals of the sort that Wall Street insiders pay attention to, such as an unusual 10% rise in long-term U.S. Treasury bonds and massive outflows from emerging markets. And Germany's economy may be heading into recession.

                                                                                                                                                                                                                       
 

It all made for a rambunctious month and tested investor resolve. On Friday, in the walk up to Labor Day weekend, stocks had recovered from most of the losses.

But if you were trying to keep up with the markets day to day, you could swing from believing that the world was imploding to thinking that there was money to be made in the Trump-induced tweets.

For Simeon Hyman, global investment strategist at ProShares, the answer is simple.

"Don't look," Hyman said. "If you are a trader, feel free to trade the tweets. The rest of us will try to ignore it."

But day traders feast on volatility, and Trump has been delivering incredible volatility with his pronunciations in tweets and to reporters.

"Everybody who is involved in the market secretly likes volatility," said Ivan Feinseth of Tigress Financial Partners. "Trump has created a lot of volatility. Active traders love volatility because it creates opportunities to move in and out of the market. You add on market pullbacks and trim on advances."

Trading is typically light in August, when the nation tends to go on vacation. It's also historically one of the worst performing months for the stock market.

Fewer, more concentrated trades can have a more dramatic effect on the market. With the external shocks of the U.S.-China trade war, Trump and bonds, stock volatility increased. Sixteen of the 22 trading days in August had swings of at least 1%. There were two such swings in July and only one in August 2018, according to Howard Silverblatt of S & P Dow Jones Indices.

Despite the volatility, economist Tom Porcelli at RBC Capital Markets said the U.S. economy is "in pretty good shape."

Porcelli said $1.8 trillion in net private savings exist in the economy, savings that enable the nation to better withstand a trade war. "That's a big number that is a buffer against a trade war that may cost $150 billion to $200 billion to the United States," Porcelli said. "That should come as some comfort." He said that "even in the extreme case, assuming U.S. consumers bear the full brunt of the tariffs, the cost would amount to between $150 billion and $200 billion."

More worrisome to Porcelli is whether Wall Street is able to shake off Trump's tweets from Aug. 23. Porcelli said many of his Wall Street contacts who usually attribute the president's tweets to "Trump being Trump" reacted differently a week ago.

"Last Friday was a different response," Porcelli said. "The people more or less willing to say, with regard to trade, it's just Trump being Trump ... they started to question more ferociously, 'Does he get it? Does he know the damage he is inflicting?' "

Arthur Cashin, UBS's trader at the New York Stock Exchange, observed during the past week's relative quiet, "We may have a president who has learned his lesson."

"I don't know what phone calls he got or didn't get," Cashin calmly told a panel on CNBC's "Closing Bell." "But I saw somebody who was trying to pull Friday back out of the fire ... I think he's going to be more modified from now on."

And if you thought the U.S. markets were crazy, check out Argentina. Granted, the South American nation has a long history of fiscal crises, but the month's one-day 48% drop (in U.S. dollar terms) was among the worst of any major market in the past 70 years.

We aren't Argentina, but the U.S. will undoubtedly see a big stock market drop -- some day. If you cannot stand the volatility, and yet you are seriously thinking about buying and selling stocks and mutual funds, you should take a breath.

Wait for the market to calm down. Then decide whether you really are invested the way you want to be when the inevitable 30% decline arrives.

Maybe you can make your portfolio tweet-proof.

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