Wall Street Faces a Dicey September Amidst Fed Uncertainty and Economic Data
The stock market is on a roll, with the S&P 500 recovering all of its August losses and nearing all-time highs. But investors are bracing for a more challenging September, a month historically known as the weakest of the year. The Federal Reserve’s upcoming policy meeting on September 17-18, coupled with a jam-packed economic calendar, hangs over the market like a storm cloud, adding to the uncertainty.
Key Takeaways:
- September is historically the weakest month for the stock market. While the S&P 500 has been on an upward trajectory, the historically weak performance of the market in September, coupled with the upcoming Fed meeting, poses a challenge for investors.
- The Federal Reserve’s interest rate decision will be closely watched. The Fed is widely expected to lower rates, but by how much is the key question.
- Investors will be glued to economic data releases, particularly the August jobs report and inflation data. These releases will provide crucial insights into the health of the economy and could influence the Fed’s decision.
- The path of easing monetary policy will be a major factor for investors. Any indication that the Fed may not cut rates as much as expected could lead to a sell-off in the stock market.
Navigating the September Storm
The Fed’s policy meeting on September 17-18 will undoubtedly be a major focal point for the market. While rate cuts are widely expected, investors are keen to understand the magnitude of the reduction. The Fed’s decision will hinge on the economic data released in the coming weeks.
"There’s going to be a lot of headline risk over the next few weeks," said Jay Woods, chief global strategist at Freedom Capital Markets. "And now that we’re through earnings season, those headlines will be under the microscope more than ever."
The economic calendar is packed with key releases, including the highly anticipated August jobs report on September 6th, and the consumer and producer price indexes set for release on September 11-12. These reports will provide crucial insights into the state of the labor market and inflation. The August jobs report is particularly important, as it follows a disappointing July report that fueled fears of slowing economic growth.
Impact of Economic Data on Rate Expectations
Any signs of a weak labor market or stubbornly high inflation could lead investors to revise their rate cut expectations, potentially hurting equities. The current Fed funds futures pricing anticipates a 1 percentage point drop in the key overnight lending rate in 2024. Some analysts believe this expectation is overly dovish, given recent data suggesting a robust U.S. economy.
"I think that expecting the Fed to cut 100 basis points in four months is a bit excessive," said Sam Stovall of CFRA. "The Fed has been saying we don’t want to reignite the flames of inflation, we want to make sure that the fire is extinguished before we walk away from the campsite."
Stovall believes the Fed will likely cut rates in September but will monitor data closely before making any further cuts. "Maybe we take November back off the table, if the data could continue to come in stronger than expected," he added. "It’s still a fluid situation, because the Fed remains data dependent."
Market Bullishness and Tech Rotation
Despite the potential headwinds, market bulls are optimistic about the S&P 500’s upside potential. They see a path towards 6,000 if the index can hold above key support at 5,560. However, the short-term outlook favors a continued rotation out of tech stocks and into this year’s market laggards. This trend was evident in Nvidia’s earnings results, which failed to significantly impact the market despite investors’ fears.
While there is potential upside in Big Tech, longer-term investors may want to maintain exposure, especially closer to year-end. "I still think that there is some upside potential between now and the end of the year, but I think we have to get through this rough patch first," said Stovall.
Looking Ahead: A Week of Economic Releases
The week ahead is packed with economic releases that will offer valuable insights into the state of the US economy and potentially impact investor sentiment. Here’s a look at the key events to watch:
Monday, September 2: Markets are closed for the Labor Day holiday.
Tuesday, September 3:
- 9:45 a.m.: S&P PMI Manufacturing final (August)
- 10:00 a.m.: Construction Spending (July)
- 10:00 a.m.: ISM Manufacturing (August)
Wednesday, September 4:
- 10:00 a.m.: Durable Orders final (July)
- 10:00 a.m.: Factory Orders (July)
- 10:00 a.m.: JOLTS Job Openings (July)
- 2:00 p.m.: Fed Beige Book
- Earnings: Hewlett Packard Enterprise, Hormel Foods, Dollar Tree
Thursday, September 5:
- 8:15 a.m.: ADP Employment Survey (August)
- 8:30 a.m.: Continuing Jobless Claims (08/24)
- 8:30 a.m.: Initial Claims (08/31)
- 8:30 a.m.: Unit Labor Costs final (Q2)
- Earnings: Broadcom
Friday, September 6:
- 8:30 a.m.: August Jobs Report
As we head into September, the stock market is navigating a precarious path marked by economic uncertainty and the looming Fed decision. The upcoming economic data releases will be crucial in shaping investor expectations and determining the market trajectory.
