(Bloomberg) — September has historically been a terrible month for traders, and with lingering questions about the Federal Reserve’s expected rate cut, it’s likely to be even harder to navigate in 2024.
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Bonds, stocks and gold typically suffered losses this month as traders reassessed their portfolios after the summer break. The S&P 500 Index (^GSPC) and the Dow Jones Industrial Average (^DJI) posted their largest percentage losses in September since 1950. Bonds have fallen in eight of the last 10 Septembers, while gold has fallen every time since 2017.
Investors may need to brace for stormier weather this time around, facing uncertainties including a key US jobs report that is seen as a key determinant of the extent and frequency of future Fed rate cuts. Stocks near record highs and Treasuries on their longest monthly winning streak in three years appear vulnerable to data shocks or surprises from a close US presidential election.
“Autumn brings declines – especially as markets are pricing in so much for Fed rate cuts and people out there are chasing the ‘Goldilocks’ scenario,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “Markets would be more nervous than usual.”
After a hectic August marked by a brief but brutal global stock market crash, investors are now looking to Friday’s employment data, which could shed light on the health of the world’s leading economy and determine the direction of the Fed’s upcoming monetary easing campaign.
With a sharp four-quarter percentage point cut in the key interest rate currently priced in by the end of the year, there is an increased risk of sharp market volatility if the Fed turns out to be less dovish than expected at its meeting, which ends on September 18.
“Seasonality in September has a checkered record, with risk aversion not uncommon and even more dramatic in election years,” wrote Bob Savage, head of market strategy and analytics at BNY, in a note. “There is a sense that the upcoming U.S. jobs report will set the course for the rest of the year.”
The S&P 500 has fallen in each of the last four Septembers, and this time nonfarm payrolls data could add weight to U.S. stocks.
“The market is currently driven by a few mega-cap technology stocks, making it vulnerable to significant downside if these stocks stumble,” said Manish Bhargava, CEO of Straits Investment Management in Singapore. “Any surprise could lead to a rapid unwinding of leveraged positions.”
Another reason for the volatility is the first televised debate between Vice President Kamala Harris and former President Donald Trump next week, an event seen as crucial to the momentum of their campaigns as the election now enters the home stretch.
One risk is “the prospect of a contested election like in 2000,” wrote Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets, in a note. While Fed Chairman Jerome Powell “has all but put aside the debate about a September rate cut, the big question is: ‘How much?'”
Given the high stakes, strategists say caution is key when navigating the markets.
According to RBC Capital Markets, hedging has looked “cheap” for some time, while LPL Financial sees opportunities in US equities in the communications services, energy and healthcare sectors. Growth and loose monetary policy are needed to keep the current equity market trend intact, according to BNY.
“Buckle up and get some extra protection,” said Hebe Chen, analyst at IG Markets Ltd.
— With support from Joanna Ossinger.
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