For investors taking a breather from the chaos in August, buckle up as the market is about to go crazy again, Goldman Sachs warned.
Wall Street is now inches away from reclaiming its record highs, but a rockier ride could be around the corner as stock volatility has been 25% higher in October on average since 1928, according to Goldman. Big price swings have been seen in each major stock benchmark and sector in October over the past 30 years, with technology and health care being the most volatile groups, Goldman said.
"We believe high October volatility is more than just a coincidence," John Marshall, equity derivatives strategist at Goldman, said in a note Friday. "We believe it is a critical period for many investors and companies that manage performance to calendar year-end."
The Cboe Volatility Index, a measure of the 30-day implied volatility of U.S. stocks also known as the VIX or "fear gauge," has been tame this month as trade tensions between the U.S. and China eased and Treasury yields bounced back from their historic lows.
But things could get chaotic again as earnings season kicks off, which should exacerbate a shift in investor sentiment.
"Such pressures boost volumes and volatility as investors observe earnings reports, analyst days and management gives guidance for the following year," Marshall said.
Seasonality is also strong in single stock volatility as earnings and other events tend to lead to bigger moves, the strategist noted.
"Not only are earnings day moves rising relative to average daily moves, but October tends to be the quarter with the largest absolute earnings day moves for U.S. stocks," Marshall said.
The VIX swung to its highest level of the year in August as the trade war escalated, fanning fears of a recession. The Dow Jones Industrial Average suffered its worst day of the year on Aug. 14 when the bond markets flashed their biggest recession signal.