After a sluggish late August, September promises to pack a punch—with enough major events to influence the course of markets into the end of the year.
A dominant theme will be the diverging policy of central banks. Two major central bank meetings—the European Central Bank Thursday and the Federal Reserve Sept. 17—will underscore the differences that already have resulted in dramatic moves in bond markets as traders prepare for higher U.S. rates and more policy easing in Europe.
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Next Friday's August employment report will be one of the more important pieces of economic news, since it could have a direct bearing on what the Fed might say about a path to higher interest rates.
Geopolitical news will continue to dominate stocks as the U.S. focuses on Syria and the Islamic State of Iraq, as well as the situation with Ukraine and Russia, which is a wild card for markets.
The European Union will discuss further sanctions on Russia at its summit this weekend, and Ukraine will be a top focus in the coming week as NATO discusses Russia's activities in Ukraine during meetings in Wales Thursday and Friday. President Barack Obama will visit Estonia ahead of that meeting and is expected to show support for Baltic States.
So far, many analysts do not see a lingering impact on stocks from the Ukraine situation, as it has not yet shown it could impact the U.S. economy or corporate profits.
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"If you had that playing out in the market, you would not see the stock market at new highs," said Jim McDonald, chief investment strategist at Northern Trust. "It's a little nerve wracking. You don't know what (Russian President Vladimir) Putin's end design is here, but there does appear to be some economic constraints on how far and fast they can go right now. They don't look like they're going to disrupt energy supply and that's what concerns the market."
One of the bigger factors traders are watching as Wall Street gets back to work after Labor Day is the composition of the market itself. With stocks lulled to new highs on low volume in late August, traders expect a serious pickup in volume—and possibly volatility—once September begins.
The S&P finished 0.33 percent higher on Friday at 2,003.37, up 0.75 percent on the week and 3.77 percent for the month of August—its best August performance since 2000.
The Dow rose 0.11 percent to 17,098.38, up 0.57 percent on the week and 3.23 percent for the month, marking its best August since 2009.
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Meanwhile, the NASDAQ rose 0.5 percent to 4,580.27, logging a 0.92percent weekly gain and a 4.82 percent gain for the month, its best August performance since 2000.
The S&P and the Dow have both gained in 10 of the last 12 months, while the NASDAQ has gained in six of the last 12 months. September is notoriously volatile and tends to be more negative than positive, but since the financial crisis, stocks have moved higher in four of the last five years.
"I think September will be very telling for the rest of this year. Just seasonally, it often is and you get all the players back, and a lot of times you get big market moves after players have been gone and they're back and re-evaluate where everything is," said James Paulsen, chief investment strategist at Wells Capital Management.
Paulsen says the market could be making its highs of the year and he expects the S&P 500 to fall back toward where it started the year, at 1,850 by year end.
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Marc Chandler, chief currency strategist at Brown Brothers Harriman, said the Fed meeting in mid-September will be extremely important because the Fed will be ready to end the tapering of its bond buying program in October, and will already be looking ahead to an era of the Fed communicating more about the return to normalcy. "The FOMC meeting is important. We should see a change in the words they use to prepare the market," Chandler said.
Economists widely expect the Fed to raise rates for the first time in the middle of next year, but any strengthening in jobs or higher move in inflation could force an earlier move by the Fed.
Focus Turns to Jobs, Fed, ECB
"The biggest (thing) to me is going to be the jobs report, and the biggest thing there is going to be the wages number. I think we're just one higher wage number away from a completely different reaction from Wall Street," Paulsen said.
Whether the labor market has healed enough has been a point of debate within the Fed, making it a hot topic for markets. Some Fed officials have argued that the slack in labor market and the lack of wage inflation makes it important for the Fed to keep rates low for longer, but some of the hawkish members say labor is already strong enough and it's time to consider returning to a more normal environment.
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The market is anticipating another strong jobs report next Friday, with nonfarm payrolls above 200,000. Paulsen expects the economy to become so strong that inflation could pick up, and that could force the Fed to move faster to hike rates, a potential shock for stocks.
In Europe, meanwhile, the ECB is expected to sound dovish in the week ahead. While there's speculation it could slightly tweak its policy, it is not expected to announce quantitative easing—or a sovereign bond buying program—any time soon, if at all. "There's a lot of pressure on the ECB to do something," Chandler said.
Since ECB President Mario Draghi spoke in Jackson Hole earlier this month, suggesting further policy moves, traders have been anticipating the ECB would take action Thursday. Investors have been barreling into European bonds, driving bund rates to record lows and shorter duration sovereigns from multiple countries to negative yields. U.S. yields have fallen with them, as Treasurys look relatively more attractive and traders play an interest rate differential.
The ECB program designed to encourage bank lending begins in mid-September, and there is speculation the ECB could entice banks to participate by making the terms more appealing with lower rates. There is also speculation the ECB could announce a plan to buy asset-backed securities.
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"The odds of the ECB doing something are reasonable. The odds of them doing something big and new in the month of September are relatively low," McDonald said. "I would argue over the next month, the economic numbers will be a bigger story because I think what we're going to get from the ECB and the Fed will be incremental," he said.
McDonald expects the Fed to raise rates in the second half of next year. "I think the Fed has given us a very clear path. Their moves are going to be very small. It will be dependent on the labor data we get between now and then as to whether they get any shift." McDonald said after watching U.S. data, he focuses on China and expects the Chinese PMI data at the end of September to be important after this month's disappointing numbers. "If the U.S. and China can do well, that would offset Europe," he said.
Besides the employment report in the week ahead, there is the ISM manufacturing survey Tuesday; Fed beige book and auto sales Wednesday and ADP employment, trade, productivity and costs, and ISM nonmanufacturing data Thursday.
Looking around the world, Chandler said there are other risks for markets lurking in September. Scotland votes on a referendum to leave the U.K. on Sept. 18. "Most people think Scotland will be staying with the U.K., but if they don't it would be very impactful," Chandler said.
Traders are also watching politics closer to home. By the end of September, Congress must act to reauthorize the Export-Import Bank, which lends and provides loan guarantees to foreign buyers of American products. Republicans oppose the authorization and Democrats are lining up behind the president. "If the Export-Import banks does not get renewed, it will show the tensions in Congress, policy paralysis and the U.S. withdrawal from the world," Chandler said.
That would take markets to the November mid-term election and focus on that should pick up after September. "I think we've got to turn our attention to the FOMC meeting before we turn our attention to the U.S. election," Cohn said.
This article originally appeared in CNBC.
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