The Stock Market’s Calm Won’t Last. Get Ready for a Volatile Fall.

A scene from the floor of the New York Stock Exchange on Monday. (Michael M. Santiago/Getty Images)

Markets are quiet. Too quiet.

In one sense, it’ isn’t surprising that not much is going on. During the last week of August, the unofficial close to summer, more people are focusing on vacation than on volatility. The market is sitting pretty after shrugging off a host of geopolitical, policy, and trade concerns that might have been expected to end the rally in stocks, or at least put it on hold.

That situation could be setting investors up for a nasty surprise when they return after the holiday, if not before, warned Bank of America analyst Matthew Welty in a note Wednesday.

The CBOE Volatility Index , commonly known as Wall Street’s fear gauge, fell to 14.22 on Friday, its lowest level this year, after Federal Reserve Chairman Jerome Powell spoke in Jackson Hole, Wyo. Many observers saw his remarks as a signal that interest rates may be coming down,

The problem is that fear-gauge reading could mean investors are dangerously close to being complacent when there is plenty to worry about.

Consider that although stocks have zigzagged in recent sessions, the S&P 500 and Nasdaq Composite were still less than 1% below their mid-August highs as of the end of trading Tuesday. The S&P 500 closed at its fourth-highest level in history, which leaves little room for error if something goes wrong.

One potential bugbear is any evidence that the artificial intelligence boom that has been powering the market is slowing. That could come as soon as Wednesday evening with Nvidia’s earnings report. Tech valuations are high, again meaning there isn‘t much wiggle room for disappointment.

Then there are concerns about the Fed’s independence. Powell’s term ends in May, and President Donald Trump has made it ultraclear that he wants a successor who would yield more readily to his wishes. Even before then, any economic data that points to stagflation or could could cause the central bank to not cut rates would be a problem. Investors are taking it at a given that the Fed will ease monetary policy at the end of the Sept. 16-17 meeting of the Federal Open Market Committee.

All of that leads Welty to warn that the “current volatility levels seem unsustainable to us.” September and October are historically difficult months for stocks, and with markets marking new highs throughout the summer, some investors may feel compelled to take at least a bit of money off the table.

Still, Welty says investors should scoop up more stock when volatility hits in the coming months. “While pullbacks during asset bubble builds are normal, we continue to believe we remain far from any true top given still subdued volatility,” he wrote.

“With drawdowns during asset bubbles bought at record speed, dip-buying seeing its second best year since the Great Financial Crisis, and both Powell and Trump likely to react to any material stress, we think an autumn sell-off is likely to be a strong buy the dip opportunity.”

It is called fall, after all. But no season lasts forever.

Write to Teresa Rivas at teresa.rivas@barrons.com