US stocks finished the month down over 3%, making August the worst month in over a year. The last month that was this bad was May of 2012. Though it is important for traders to keep in mind that the August sell-off comes on the heels of an extremely positive start to the year.
That being said, some investors are worried that September may be a turbulent month because there are a number of major problems lurking, stocks have a lot of gains going into the fall and September has traditionally been a rough month for stocks.
There are a number of issues that investors should keep an eye on as we approach the fall. First, there has been a tremendous amount of speculation that the United States may get involved in a military action against Syria, after there was an attack with chemical weapons, which is being blamed on the Regime of President Assad. If the US does go to war, there could be some major geo-political implications that could affect the balance of power in the Middle East, the price of oil or some other unforeseen consequence may emerge.
Emerging Markets Crisis
The second factor to keep an eye on is the implosion in the emerging markets. This is perhaps the most serious development (with the exception of Syria arguably) on this list. India has fallen into an economic tailspin as their currency has dropped to record levels and the country faces its worst financial and economic crisis since 1991. A number of other emerging markets are in trouble, including Turkey and Malaysia. If a broader economic crisis infects the recovery in the West or there are unpredictable ripple effects in the financial markets, US stocks may be in for some trouble. The slow-down in China may also exasperate these problems as well.
A less volatile, but none-the-less important development to watch is the German national election on September 22nd. According to polls, Angela Merkel looks poised to win the election handedly as we approach the final weeks of the campaign. Everyone (including the markets) expects Merkel to win, so if there is an upset, or a last minute change in the polls, there could be some turbulence coming out of Europe once again.
Fed Tightening, and Bernanke's replacement
The final factor I will be watching is the rhetoric coming out of the Federal Reserve, and the drama involving the replacement of Ben Bernanke. If the Federal reserve begins to taper their easy monetary policies, there may be a major re-balancing of risk. In fact, the problems in the emerging markets are seen by some analysts as the direct result of investors and banks pulling out of risky foreign assets in anticipation of tightening by the Federal Reserve (or at least a minor retreat from the easy money policies of the past few years).
Regardless, US stocks have still posted solid gains for the year, and there may be some investors and asset managers who feel that it may be time to take some profits to lock in those gains. So investors should be alert as we move into the fall.