The US markets are closed on Monday due to the Labor Day holiday, which should mean that markets are quiet at the start of the week. However, September can be an epoch-shifting month for financial markets, and historically one that is bad for equities. After a dismal performance for most of August, risk sentiment picked up at the end of last month. The S&P 500 rose 2.88% last week, however, it fell 0.77% in August overall. The question now is, can this upward momentum be maintained? This will depend on multiple factors, including the reception of the ARM IPO, which is scheduled to list on the Nasdaq this month, and the market’s view on what comes next from the world’s major central bankers.
The September effect
The first topic we want to talk about in this note is the “September effect”, with this month historically being the worst for investing across all three major US stock indices. According to the Stock Traders’ Almanac, in September the average decline for the Dow Jones is 0.8%, for the S&P 500 this is 0.5%, and this average goes all the way back to 1950. The same can be felt in markets across the world. The “September effect” is considered a market anomaly, i.e., it is not caused by a massive coincidence of negative market news or events that keep occurring in September. Instead, some analysts believe that it is caused by investors shifting their portfolios this month due to the end of summer/ start of the new school year etc. Another reason why losses can mount in September is because mutual funds cash in their holdings to harvest tax losses, and many mutual funds end their tax year in September. Thus, for a retail investor trying to navigate the winds of change in financial markets, this news can feel like a kick in the teeth. The solution for traders could be two-fold – follow the big/ real money and don’t trade in September or stay invested and try to look through one month of bad returns that are not your fault. It’s also worth noting that markets are all connected, so just because you trade FX doesn’t mean that you won’t be impacted by this seasonal pattern in returns. Typically, when markets enter a risk off patch, this is good news for the dollar. The dollar rose more than 1.63% last month and benefitted from the decline in stocks.
Tech and energy still in demand
There is also some hope for those traders who trade more than just indices. The research looks at the impact of the “September effect” on the overall index, not on individual sectors, where there is much more variance. As we move into September and the last month of Q3, the orientation of the market is still a growth market that is obsessively focussed on the market leaders, which are currently energy and tech sectors. Thus, these sectors may continue to do well, regardless of history.
What next for the Fed?
At the start of this week, expect markets to continue to digest the August payrolls report that came out on Friday. The report was considered a “goldilocks” report – not too hot or too cold. The headline NFP number was 187k vs 170k expected, there were declines for average hourly earnings, although we have mentioned that an average measure for wage growth is basically meaningless, as it doesn’t reflect declines in wages for the lower paid sectors, who could be suffering even though higher paid sectors are doing ok. The unemployment rate ticked up to 3.8%, and the underemployment rate rose to 7.1% from 6.8%, which is the highest level since June 2022. This report suggests that the US economy could be cooling enough for the Federal Reserve to hold off on further interest rate hikes. The market is now nearly certain that the Fed will hold off from hiking rates when it meets on 20th Sept, and there is only a 6% chance of a hike to 5.5-5.75% currently priced in by the Fed Fund Futures market. Of more interest is what the Fed will do down the line. Recent data suggests that the market is starting to reduce expectations of further Fed rate hikes this year. Right now, there is a 30% chance of a rate hike to 5.5- 5.75% by year end, this had been over 45% a week ago. Thus, current market pricing suggests that we are at the peak in interest rates for the Fed’s current hiking cycle, although markets are being cautious about pricing in the Fed cutting rates too quickly. If the economic outlook continues to show a “goldilocks” scenario, then the upside is no more rate hikes, but the downside is no rate cuts anytime soon. This could leave the dollar on a solid footing for more gains.
Data releases to watch this week
Elsewhere, while we won’t get the “sexiest” economic data releases this week, there is still some sturdy data points to watch out for. On Monday Christine Lagarde will give a speech, and all eyes will be on her reaction to stronger than expected Eurozone CPI for August, it is worth watching the reaction of the euro since the single currency could rise if she sounds hawkish. On Tuesday we will get the final reading of European and UK PMIs, which were disappointing. We also get the Chinese Caixin PMI report – will this private survey also find that the manufacturing sector is picking up. On Wednesday we will watch the US ISM service sector survey for August to see if it heads south in the same way as the UK’s report did. On Thursday, Chinese import and export data is worth watching, a slump in imports could be further bad news for Germany. Thursday also sees the release of UK Halifax house price data for the 3 months for August. The summer months tend to be slow for the housing sector, we will find out just how slow.
Arm and UK data revisions
Finally, it is worth watching out for any comments about the ARM IPO that is scheduled to take place this month. ARM is targeting a valuation of between $50- $55BN, although some people think this is too rich, with some analysts pegging a valuation range closer to $45-$50bn. A lot is resting on the biggest IPO of the year jump-starting the broader IPO market after a sluggish period, thus any talk on valuation downgrades or upgrades are worth watching as they could impact market sentiment. We will also be listening to the fallout from the ONS’s large upward revisions to UK growth over the pandemic period, which suggests 1, the UK was not a global outlier and instead somewhere in the middle of the pack, and 2, that the UK has an economic PR problem, especially in a world where other countries’ economic rodomontade keeps the UK in the shade. This is a topic for a different note, but it is fascinating, nonetheless.