Tailwinds into Sept FOMC next week. But Sept has peculiar seasonality to be minding.

VIDEO: We see positive tailwinds supportive for stocks into next week and post-FOMC rate decision (Wed).  But we cannot also shake the peculiar seasonality of Sept

Please click below to view our Macro Minute (duration 4:46).

The month of September can be summarized as follows: after tumbling -4% (4th worst Sept. start since 1928), the S&P 500 has clawed its way back to nearly flat. We continue to see equities challenging between Sept and election day. And the best case remains a range for S&P 500 between 5,350 to 5,700.

• Into next week’s Sept FOMC rate decision, equities probably strengthen. The reasons are obvious. The Fed funds rate of 5.50% is super restrictive (core inflation running at 2% roughly past 6 months). And this week’s August CPI and PPI data show inflation trending close to the 40-year averages.
• Thus, the Fed’s anticipated Sept cut is the start of an easing towards a neutral rate. While this is not an entirely clear figure, this is probably a Fed funds rate between 2.5% to 3.0%, or substantially lower than the 5.5% today. In other words, the Fed should be making as many as 6 cuts to get towards Neutral.
• There are many who think this first Fed cut will be bad for stocks. In fact, pundits cite that stocks fall half the time when the Fed makes it first cut. Our data science team, led by “tireless Ken,” analyzed the forward returns post-Fed cut.
  – Of the 10 Fed “first cuts” the team analyzed
  – 5 were Fed cuts and economy toppling into recession:
  – July ‘74, April ‘80, June ‘81, Jan ‘01 and Sept ‘07
  – 6 were Fed cuts and “no landing”
  – Jan ‘71, Oct ‘84, Oct ‘87, July ‘89, July ’95, Sept ‘98
• There is a substantial difference in market reaction between the two groups:
  – S&P 500 return: recession vs “no landing”
  – 1W -0.3% vs -0.1%
  – 1M +0.5% vs +5.2%
  – 3M -7.5% vs +9.7%
• There differences are clear. The Fed is cutting this cycle, while the economy is clearly expanding. And the Fed is removing overly restrictive rates as inflation is cooling. This is a “no landing” scenario. And should be positive for stocks.
• Mark Newton, Head of Technical Strategy, also see stocks positive into next week:
  “Overall, the near-term bias is for a continued rally into next week ahead of a potential slowdown into FOMC…, given the back month negative seasonality trends, initially it’s expected that the area near 5650 should prove to be strong resistance for SPX”
• We are still in the challenging 8 week period into election day (11/5). As we noted last week, there was no fundamental reason for stocks to fall so sharply. But this decline has also suggested that turbulence into the rest of the month (past next week) is still potentially significant.
• Of the 10 worst Sept start (first 4 days) since 1928, here are some stats:
  – Day 5 to month end return: -5.2%, win-ratio 30%
  – Sept 1 to month end return: -8.6%, win-ratio 0%
  – S&P 500 0 for 10 for Sept
  – Yup, 0 for 10
• Of the 20 worst Sept start (first 4 days) since 1928, here are some stats:
  – Day 5 to month end return: -3.0%, win-ratio 20%
  – Sept 1 to month end return: -5.0%, win-ratio 0%
  – S&P 500 0 for 20 for Sept
  – Yup, 0 for 20

• This is really puzzling to me. I cannot explain this strange seasonality. But this is the base case:
  – 2024 first 4 days -4.2% (4th worst ever)
  – 20 worst first 4 days, never saw a positive Sept
  – could 2024 break this pattern?
  – Maybe
• And as we noted, this means we expect the August lows to hold (5,100):
  – since 1928, the most common month for Summer low is August (46%)
  – since 1928, the most common month for Volatility peak is Oct (63%)
  – You get the picture, choppy but the lows hold.
• Here are the 6 reasons we expect S&P 500 to finish the second half (2H) strong:
  – “Soft landing” intact, not barreling towards recession
  – High-yield bonds rallied in Sept, positive divergence versus S&P 500
  – S&P 500 advance/decline reached new high in August, signaling new highs inbound for 2024
  – NVDA +1.25% -25% drawdown is the 21st past 25 years (since 2000)
  – 2024 already a “strong market” year, 2H gain +10%
  – While VIX might peak near election day, S&P 500 bottoms in August 46% of time.
  – Meaning, we expect August lows to hold

BOTTOM LINE: Small-caps lead, Fed is dovish

• Keep in mind the Fed is dovish and there is a focus on keeping labor markets strong. We could be seeing turbulence for the next 8 weeks, but this is also in the context of a very strong stock market in 2024. One where the S&P 500 has gained in 7 of the last 8 months.
• And with inflation softening, the mandate focuses on strong jobs. That acts as an implicit “put” on the equity market, as falling asset prices would threaten to weaken labor markets.

Given the dovish Fed, this remains our 2024 playbook:

• Stick with what is working
• Small-caps IWM IJR
• Financials and Industrials XLI XLF
• AI/Tech NVDA CDNS ARM AMD AIQ
• Ozempic-related LLY NVO
• Bitcoin & Proxies:
  BTC MARA PYPL COIN MSTR SMLR
• But as we noted multiple times, we stick with the top 2 (small-caps and financials and industrials).

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Key incoming data September:

• 9/3 9:45 AM ET: Aug F S&P Global Manufacturing PMI Tame
• 9/3 10:00 AM ET: Aug ISM Manufacturing PMI Tame
• 9/4 8:30 AM ET: Jul Trade Balance Tame
• 9/4 10:00 AM ET: Jul JOLTS Job Openings Tame
• 9/4 10:00 AM ET: Jul F Durable Goods Orders Tame
• 9/4 2:00 PM ET:  Fed Releases Beige Book Tame
• 9/5 8:30 AM ET: 2Q F Non-Farm Productivity Tame
• 9/5 8:30 AM ET: 2Q F Unit Labor Costs Tame
• 9/5 9:45 AM ET: Aug F S&P Global Services PMI Tame
• 9/5 10:00 AM ET: Aug ISM Services PMI Tame
• 9/6 8:30 AM ET: Aug Non-Farm Payrolls Tame
• 9/9 9:00 AM ET: Aug F Manheim Used vehicle index Mixed
• 9/9 11:00 AM ET: Aug NY Fed 1yr Inf Exp Tame
• 9/10 6:00 AM ET: Aug Small Business Optimism Survey Tame
• 9/11 8:30 AM ET: Aug CPI Tame
• 9/12 8:30 AM ET: Aug PPI Tame
• 9/13 10:00 AM ET: Sep P U. Mich. Sentiment and Inflation Expectation
• 9/16 8:30 AM ET: Sep Empire Manufacturing Survey
• 9/17 8:30 AM ET: Aug Retail Sales Data
• 9/17 9:00 AM ET: Sep M Manheim Used vehicle index
• 9/17 10:00 AM ET: Sep NAHB Housing Market Index
• 9/18 2:00 PM ET: Sep FOMC Decision
• 9/18 4:00 PM ET: Jul Net TIC Flows
• 9/19 8:30 AM ET: Sep Philly Fed Business Outlook
• 9/19 10:00 AM ET: Aug Existing Home Sales
• 9/23 8:30 AM ET: Aug Chicago Fed Nat Activity Index
• 9/23 9:45 AM ET: Sep P S&P Global Manufacturing PMI
• 9/23 9:45 AM ET: Sep P S&P Global Services PMI
• 9/24 9:00 AM ET: Jul S&P CoreLogic CS home price
• 9/24 10:00 AM ET: Sep Conference Board Consumer Confidence
• 9/25 10:00 AM ET: Aug New Home Sales
• 9/26 8:30 AM ET: 2Q T 2024 GDP
• 9/26 10:00 AM ET: Aug P Durable Goods Orders
• 9/27 8:30 AM ET: Aug PCE Deflator
• 9/27 10:00 AM ET: Sep F U. Mich. Sentiment and Inflation Expectation
• 9/30 10:30 AM ET: Sep Dallas Fed Manuf. Activity Survey

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: