September is living up to its bad image as the worst month for the stock market. This is happening even though the Federal Reserve is getting ready to finally cut interest rates next week.
Investors are sick because they think the monetary easing has been put off for too long, but they can’t be sure.
A note from Ivan Martchev, a financial strategist at Navellier & Associates, said, “I think the Federal Reserve is late in cutting interest rates, but Jerome Powell will be forgiven a lot of mistakes if he avoids a recession, which at this stage is still unknowable.” Martchev was talking about the Fed chair.
The market drop was again put on a string of bad economic data, just like it was at the start of August. Even though things weren’t all bad, investors seemed scared by another weak Institute for Supply Management manufacturing sector gauge. Even signs of growth in the much bigger services sector didn’t help lift the mood.
But the big event, the August jobs report on Friday, didn’t reveal much. It wasn’t a question of whether the Fed would cut rates by 25 basis points or 50 basis points on September 18. It had already made it clear that it was taking those steps. People who follow the Fed thought that the jobs statistics would quickly settle the issue.
It wasn’t.
For those who believe in 50 basis points, nonfarm payrolls only went up by 142,000, while predictions were for them to go up by 161,000. Also, numbers from previous months were revised heavily downward. For those in the 25 basis point camp, the unemployment rate went from 4.3% to 4.2%, and average hourly pay went up, which made people feel better about the health of the consumer.
As prices changed around the size of a September rate cut, Fed-funds futures went through a lot of ups and downs. At first, Fed Gov. Chris Waller’s comments were seen as a sign that he was open to a big cut, but soon, bets turned back toward a smaller move. The CME FedWatch Tool shows that at the end of the day, buyers thought there was a 30% chance of a 50 basis point cut and a 70% chance of a 25 basis point move.
All eyes are now on next week’s inflation figures, which may have the final say. This will include the August consumer-price index. It’s important because big moves by the Fed can be scary, even though investors have long wanted rate cuts—traders initially priced in seven quarter-point drops in 2024—big changes by the Fed can be upsetting.
A half-point cut isn’t a “good sign” for markets, according to Chris Graham, chief investment officer at Nationwide Financial. “At that point, I think people are starting to price in more of a recession than if the Fed can cut at a steady clip of 25 basis points for a few meetings,” Graham said.
The market and economy are also showing signs that the Fed’s round of quick, bold rate hikes, which raised the fed-funds rate from almost zero in March 2022 to its current level of 5.25% and will reach 5.5% by July 2023, are finally starting to have an effect.
Larry Adam, chief investment officer at Raymond James, wrote in a Friday note that the tasks that need the most capital and are affected by interest rates are slowing down.
He also said that sales of cars dropped to the second-lowest level in the last 18 months and that building spending fell for the first time in over 20 months. Manufacturing activity continued to slow down.
Adam pointed out that low-income customers are still in pain, which is in line with the weakness that discount retailers reported in their quarterly results this past week. Dollar Tree DLTR -2.88% shares fell more than 21% this week after the company released its quarterly report. Dollar General DG 2.70% said that customers were having trouble sticking to their budgets until the end of the month because spending slowed down at the end of each month.
The yield on the 2-year note TMUBMUSD02Y 3.654% closed below the 10-year Treasury yield TMUBMUSD10Y 3.713% on Friday, which was the first time since July 1, 2022 that the bond market sent a sign of a recession. That means things are back to normal, and the yield curve is now going up. But when an inverted curve starts to collapse, it usually means that a recession is coming soon.
All of that sounds scary, but keep in mind that stocks usually do badly in September. According to Dow Jones Market Data, the S&P 500 has dropped an average of 1.2% each month in September and has only finished the month better 44.3% of the time since 1928.
The S&P 500 is still only 4.6% below its all-time high set on July 16.
Graham from Nationwide Financial said that the movement on the stock market below the surface is more reassuring.
The market value of chipmaker Nvidia Corp. NVDA -4.09% dropped by $406 billion this week, the most for any U.S. company ever. Nvidia is the biggest winner from the AI boom and one of the so-called “Magnificent Seven” megacap tech stocks. The biggest loser in the S&P 500 was the tech sector, which fell more than 7% in a week.
Graham said that investors have been waiting for the stock market rise to spread out. Even though most stocks lost money this week, when the prices of the biggest fads drop, the prices of other parts of the market generally go up.
He said it would be good if companies with price-to-earnings ratios in the high 20s could move closer to 21-22 times earnings and others could move from 15-16 times earnings to 18-19 times as earnings for both groups rose.
He said that short-term worries about growth aside, the economy seems to be in the “soft landing” that investors have been waiting for a long time. At the same time, the market as a whole is about to start benefiting from an increase in productivity due to AI.
Adam at Raymond James also doesn’t think a recession is likely, even though things have been looking bad lately and the yield curve has begun to rise.
“Even though the yield curve has a good track record, we think we can avoid a recession.” Why? He wrote, “The Fed has a lot of tools it can use to cut rates to help the economy through this rough patch and keep the expansion going.”
At the same time, Martchev of Navellier asked if the difference between a “soft landing” and a decline will really matter in the long run.
“Right now, it looks like the U.S. economy will have a soft landing, but I think the line between that and a mild recession is getting less clear,” he wrote.
