September is once again proving to be a challenging month for U.S. equities, as the stock market braces for the Federal Reserve’s long-awaited interest rate cut, slated for the week after next. Despite anticipation around the Fed’s move, investor sentiment remains fraught with uncertainty, with fears that the central bank may have waited too long to act.
Investment strategist Ivan Martchev of Navellier & Associates believes the Federal Reserve has been tardy in its decision to cut rates. “The Fed might be late, but if Jerome Powell manages to avoid a recession, he could still be forgiven,” Martchev noted, highlighting the uncertain economic outlook.
Recent performance underscores this market anxiety. The S&P 500 ($SPX) dropped 4.3% in a holiday-shortened week, and the Dow Jones Industrial Average ($DJIA) fell 2.9%, marking the steepest weekly losses since March 2023. The tech-heavy Nasdaq Composite ($COMP) suffered even more, declining 5.8% for its worst week since January 2022. The downturn was triggered by mixed economic signals, including another weak Institute for Supply Management manufacturing report, which overshadowed the positive news from the services sector.
The latest U.S. jobs report added to the confusion. The nonfarm payrolls for August increased by just 142,000, missing expectations of 161,000, while the unemployment rate dipped slightly to 4.2%. This mixed data failed to clarify whether the Fed would opt for a 25-basis-point or a 50-basis-point rate cut at its September 18 meeting. Fed-funds futures markets swung wildly, reflecting the uncertainty, with a 30% probability priced in for a 50-basis-point cut and a 70% chance for a smaller move, according to the CME FedWatch Tool.
Looking ahead, the focus now shifts to next week’s inflation data, particularly the August Consumer Price Index, which could offer a decisive signal on the Fed’s next steps. The market has been pricing in several quarter-point cuts throughout 2024, but a larger-than-expected cut could imply more severe economic distress. “A half-point cut isn’t necessarily a good omen for markets,” remarked Chris Graham, Chief Investment Officer at Nationwide Financial. “It suggests recessionary fears may be gaining traction.”
The backdrop is already concerning. The Fed’s rapid rate hikes, which pushed the federal funds rate from near-zero in March 2022 to the current range of 5.25%-5.5%, are showing signs of weighing heavily on the economy. According to Larry Adam, Chief Investment Officer at Raymond James, rate-sensitive sectors like manufacturing and auto sales are particularly feeling the pinch. Motor vehicle sales dropped to the second-lowest level in 18 months, and construction spending declined for the first time in over 20 months.
Consumer weakness is also apparent, particularly among lower-income groups. Discount retailers like Dollar Tree (DLTR) and Dollar General (DG) reported weaker-than-expected sales, with Dollar Tree shares plummeting 21% following its latest earnings update. The end-of-month spending slowdown suggests that many consumers are struggling to stretch their budgets.
The bond market has also flashed warning signs. On Friday, the yield on the 2-year Treasury note ($TMUBMUSD02Y) fell below the 10-year yield ($TMUBMUSD10Y) for the first time since July 2022, reversing the inverted yield curve that often signals an impending recession. Although this might suggest an economic downturn is near, some experts urge caution against panic. Historically, September is a challenging month for stocks, with the S&P 500 posting an average decline of 1.2% and finishing higher only 44.3% of the time since 1928, according to Dow Jones Market Data.
While tech stocks like Nvidia Corp. (NVDA) have experienced sharp pullbacks, losing $406 billion in market value last week—the largest on record for a U.S. company—Chris Graham believes the broader market is poised for a healthier rotation. If high-flying stocks with price-to-earnings ratios in the upper 20s can adjust to more reasonable levels, while undervalued sectors improve, the market might find a more balanced footing.
Larry Adam at Raymond James also remains optimistic, arguing that despite the yield curve’s recessionary signal, a downturn is not inevitable. “The Fed has plenty of tools to stave off a recession by adjusting rates to support the economy through this slowdown,” he noted.
However, Ivan Martchev from Navellier raises a provocative question: does it really matter whether the economy experiences a “soft landing” or a mild recession? With the distinction becoming increasingly blurred, traders and investors should remain vigilant, ready to adapt to whatever twists the market might take.
Key Takeaways:
- Market Uncertainty Heightens: Investors remain on edge as the Fed prepares to cut rates, with fears the move might come too late to prevent an economic slowdown.
- Economic Data Sends Mixed Signals: Jobs data and Fed commentary provide no clear direction, leaving markets guessing on the size of the upcoming rate cut.
- Rate Sensitivity Evident in Multiple Sectors: Manufacturing, auto sales, and consumer spending show signs of strain, reflecting the impact of the Fed’s previous aggressive rate hikes.
- Yield Curve Sparks Recession Concerns: A return to a normal yield curve has historically preceded recessions, adding to the market’s apprehension.
- Investors Seek Broader Market Recovery: Despite tech sell-offs, opportunities may emerge if market valuations become more balanced.
Conclusion:
As the Federal Reserve approaches its critical rate decision, markets remain gripped by uncertainty. Traders should closely monitor inflation data and Fed commentary to gauge the central bank’s next steps. While concerns about a recession loom, signs suggest that both the Fed and the broader economy have some tools left to navigate the current turbulence.
