September is traditionally a bad month for traders, and this year's September has the potential to be even tougher given lingering questions about expectations for Federal Reserve rate cuts.
Stocks, bonds and gold typically suffer losses this month as traders reassess their portfolios after the summer break. The S&P 500 and Dow Jones Industrial Average both posted their biggest monthly declines in September since 1950. Bonds have fallen in eight of the past 10 Septembers, while gold and silver have fallen every September since 2017.
Investors may need to brace for a stormier ride this time around, with uncertainty including a crucial U.S. jobs report seen as key to how much and how often the Federal Reserve will cut rates in the future. Meanwhile, U.S. stocks are trading near record levels and U.S. Treasuries are on their longest monthly winning streak in three years, all of which are vulnerable to data shocks or surprises from the U.S. election.
“Fall is the season for declines, especially with the market pricing in so much Fed rate cuts and people chasing Goldilocks, markets will be more edgy than normal,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank.
After a brief but brutal rout in global stocks in August, investors are now turning their attention back to Friday’s jobs data, which could shed light on the health of the world’s largest economy and shape the trajectory of the Federal Reserve’s upcoming monetary easing.
Markets have already priced in a massive 100 basis point rate cut by the Federal Reserve by the end of the year, and if the central bank is less dovish than expected at its meeting that ends on Sept. 18, the risk of sharp market swings will increase.
“September is historically volatile, with risk aversion not uncommon, but exacerbated in an election year,” Bob Savage, head of market strategy and insight at Bank of New York, wrote in a note. “There is a sense that the upcoming U.S. jobs report will dictate market direction for the rest of the year.”
This time, non-farm payrolls data may have a greater impact on U.S. stocks.
“The market is currently driven by a few large-cap tech stocks and if these stocks fall, the market can easily fall sharply,” said Manish Bhargava, chief executive of Straits Investment Management in Singapore. “Any surprise could lead to a rapid unwinding of leveraged positions.”
The first televised debate between U.S. Vice President Harris and former President Trump next week is another destabilizing factor.
"One risk is a contentious election like the one in 2000," Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, wrote in a note. "Also, while Fed Chair Powell has largely eliminated any debate about whether they will cut rates in September, the big question is 'how much'."
With so much at stake, strategists say caution is key to navigating the market.
RBC Capital Markets believes downside hedging has been “cheap for quite some time,” while LPL Financial sees opportunities in U.S. communication services, energy and healthcare stocks.
“Buckle up and make sure the extra protections are in place,” said Hebe Chen, an analyst at IG Markets Ltd.
The Bank of New York believes that growth-enhancing accommodative policies are needed to keep the current stock market trajectory intact.
Mislav Matejka, a strategist at JPMorgan Chase & Co., said the stock market rally is likely to stall near record highs even if the Federal Reserve cuts rates.
Matejka, one of the most bearish strategists on stocks this year, believes any policy easing would be a response to slowing economic growth and therefore a "reactive" rate cut. Seasonal trends are another obstacle.
Other market strategists, including Bank of America's Michael Hartnett, have also recently warned that the Fed's first rate cut will be a catalyst for selling rather than driving stocks higher again.
Article forwarded from: Jinshi Data
