September’s Standard Stock Market Woes

September is proving to be a challenging month for investors, living up to its historical reputation as a tough time for stocks. The S&P 500 experienced a significant decline of 4.2% last week, driven by growing concerns regarding the U.S. economy’s health. The monthly jobs report released on Friday revealed that job additions fell short of expectations, while Tuesday’s disappointing manufacturing data resulted in the index’s worst performance since early August.

Historically, September has been the weakest month for the S&P 500, with the index declining an average of 1.2% since 1928. In fact, it has ended lower 56% of the time during this period, according to Dow Jones Market Data.

As investors look ahead, all eyes will be on Wednesday’s inflation report to assess whether price pressures are easing. Additionally, the performance of major tech stocks, particularly Nvidia, will be closely monitored as they attempt to recover from recent losses. Analysts and portfolio managers are grappling with a more pessimistic outlook following a robust rally in the first half of 2024.

“We were already tensed up [ahead of the jobs report], and now it seems like economic data is not moving in the right direction,” said Callie Cox, chief market strategist at Ritholtz Wealth Management.

The Federal Reserve is widely anticipated to cut interest rates at its upcoming meeting on September 18. The key question remains whether the Fed will opt for a traditional quarter-percentage point reduction or take a more aggressive stance with a half-point cut.

Market observers, including Cox, were left wanting for clarity after the jobs report. While job growth in August was stronger than the previous month, the overall numbers still fell short of expectations, and the unemployment rate edged down.

Some investors are advocating for a more substantial rate cut to stimulate the labor market, while others express concern that such a move could send a negative signal to financial markets, potentially triggering a deeper downturn.

In addition to the uncertainty surrounding the Fed’s plans, market volatility is expected to persist as the November election approaches. Historically, October has been the weakest month for stocks during election years, with the S&P 500 averaging a decline of 1.4% since 1980.

Despite the S&P 500 being up 13% year-to-date, sentiment has shifted in recent weeks. The weaker-than-expected jobs report in July raised questions about the economy’s resilience and whether the Fed had delayed necessary rate cuts. The unwinding of popular trades on August 5 further exacerbated the situation, leading to the S&P 500’s worst day in nearly two years.

This downturn has reshuffled the market’s winners and losers, with Nvidia and other AI-related stocks losing some of their luster. Nvidia’s stock plummeted 14% last week, erasing a staggering $405.7 billion in market value—the largest loss for any company on record. In response, investors have shifted their focus to defensive stocks, with only the consumer staples and utilities sectors showing gains this month.

Should the S&P 500 finish September in the red, it would mark its fifth consecutive decline for the month.

The extent to which the so-called “September effect” influences market behavior remains uncertain. One prevailing theory suggests that traders returning from vacation may sell off their winners and harvest tax losses, amplifying market movements, according to Jay Woods, chief global strategist at Freedom Capital Markets.

“September kicked us in the teeth on day one,” Woods remarked. “Now, we’ll have to see if we can recover.”

Despite the recent market downturn, some metrics indicate that stocks may still be overvalued. Companies within the S&P 500 are currently trading at 21 times their projected earnings for the next 12 months, surpassing the 10-year average multiple of 18, as reported by FactSet.

In the bond market, Treasury yields fell following the jobs report, with the benchmark 10-year Treasury yield closing at 3.710%, its lowest level of the year. Typically, bond yields decline as prices rise, as investors seek the safety of U.S. Treasurys during turbulent market conditions.

“The question is how much does the Fed need to react to the idea of a slowing labor market as opposed to a shrinking labor market,” posed Steve Sosnick, chief strategist at Interactive Brokers.

As September unfolds, investors will be keenly watching for signs of recovery amid the prevailing uncertainty.