Wall St Week Ahead – US Summer Stock Market Rally Under Threat As September Approaches

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NEW YORK — The S&P 500’s 13% rally from its June lows will soon come up against what has historically been the toughest month for the U.S. stock market, sparking nerves among some fund managers from a wide massive sale in September.

The S&P has been in a bear market since its fall earlier this year as investors priced in expectations of aggressive interest rate hikes from the Federal Reserve, but it has rallied strongly since June, recouping half of its its losses for the year.

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This rebound was fueled by a combination of strong earnings from flagship companies and signs that inflation may have peaked, potentially allowing the Fed to slow rate hikes.

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But as investors and traders return from summer vacation, some are worried about a bumpier ride into September, partly because of seasonal concerns and partly because of nervousness over the pace of price increases. the Fed and the resulting impact on the economy.

September is typically a down month for the stock market as fund managers tend to sell underperforming positions as the end of the third quarter nears, according to the Stock Trader’s Almanac.

« We had a breathtaking run and I wouldn’t be shocked if the market took a hit here, » said Jack Janasiewicz, senior portfolio strategist at Natixis Investment Management Solutions.

The S&P 500 could fall as much as 10% in September as investors weigh the likelihood that the Fed won’t start cutting rates as soon as some had hoped, Janasiewicz said.

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September has traditionally been the worst month for the S&P 500 since 1945, with the index advancing just 44% of the time, the lowest of any month, according to CFRA data. The S&P 500 posted an average loss of 0.6% in September, the worst performance of any month.

The index is down 13.1% since the start of the year. This performance was helped by a nearly 14% gain since June, when the index hit its lowest level since December 2020 and entered a bear market after the Fed announced its biggest rate hike since 1994. .

The main reason for the gloomy outlook is the belief that the Fed will continue to raise interest rates and keep them above neutral for longer than markets expected just a week ago, weighing on consumer demand and the real estate market.

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Nearly half of market participants now expect the fed funds rate to top 3.7% by the end of the year, up from 40% a week ago, according to CME tool FedWatch . The federal funds rate is currently between 2.25 and 2.5%.

When Fed Chairman Jerome Powell speaks on Friday, market participants will be eager to know how long the central bank plans to raise rates. Powell, who is delivering a keynote address at the Kansas City Federal Reserve’s annual monetary policy conference in Jackson Hole, Wyoming, may use the opportunity to calm investor expectations of lower borrowing costs in 2023.

The FOMC meeting scheduled for September 20-21 will also likely bring volatility during the month, pushing the S&P 500 to fall near its June lows, said Sam Stovall, chief investment strategist at CFRA. Before that, critical economic data, such as a reading of consumer prices, will give investors a better understanding of whether inflation has peaked.

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The strong rally since June, however, suggests the index will continue to rebound through December, Stovall said.

« Although we may end up retesting the June low, history says we will not set new lows, » he said.

While fund managers as a whole remain bearish, the bull/bear ratio has improved since July, reducing the likelihood of outsized gains in the months ahead, according to a Bank of America survey released Aug. 16. The bank’s clients were net sellers of US stocks. shares last week for the first time in 8 weeks, suggesting investors are becoming more defensive, the bank said.

Meanwhile, hedge funds’ use of leverage – an indicator of their willingness to take risk – has leveled off since June and is now near the lowest level since March 2020, according to Goldman. Sachs.

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Investors may continue to shift away from cyclical value-oriented stocks that benefit from rising inflation and toward technology and other growth stocks that can gain market share despite an economic slowdown as the Fed continues to stress that she will hold rates until they see signs of the labor market cooling, said Tiffany Wade, senior portfolio manager at Columbia Threadneedle Investments, which is overweight mega-cap stocks like Amazon. com and Microsoft Corp.

“We expect the pullback to start with some of the riskier names that have risen a lot since June,” she said.

(Reporting by David Randall; editing by Megan Davies and Chizu Nomiyama)