Source: Barron Chinese
Author: Avi Salzman

Along with September comes the thickening autumn and the start of a new football season. It also brings rate cuts. If past trends are any indication, the US stock market may experience selling in September.

This may be why investors had a relatively muted reaction after hearing the news they had been anticipating last Friday (August 23rd). Federal Reserve Chairman Powell said in his keynote speech at the Jackson Hole central banking conference that the Fed is expected to cut rates in September, marking the first rate cut since 2020. The stock market subsequently rose, but remained below the historic high set in July.$S&P 500 Index (.SPX.US)$It rose 1.1% last Friday, about 1% lower than the historic high set in July.

Dow Jones Industrial Average,$Nasdaq Composite Index (.IXIC.US)$The increase in the S&P 500 index last week was slightly higher than 1%. The three major stock indexes all achieved their best weekly performance of 2024 the previous week.

Investors still have reasons to be optimistic. It appears that the Federal Reserve is on track for a "soft landing", and this expectation has been reflected in stock prices: the US stock market rebounded after the "Black Monday" in early August. However, the expected interest rate cut (expected to be announced on September 18) is increasingly resembling a "sell the news" event - especially if the rate cut is 25 basis points instead of 50 basis points. Currently, the number of market participants expecting a 25 basis point rate cut is roughly twice the number expecting a 50 basis point rate cut.

The problem is that in recent years, September has brought mostly pain to the stock market, and this year the market situation looks uncertain once again. In the past four Septembers, the US stock market fell by 3.9%, 4.8%, 9.3%, and 4.9% respectively.

Steve Sosnick, a strategist at Interactive Brokers, said, "Investors are entering a seasonally challenging period, and a lot of bullish news has already been priced in."

The S&P 500 index has a price-earnings ratio of 22 times based on expected earnings for the next four quarters, which is relatively high. At the same time, heavyweight investors like Warren Buffett have been selling stocks.

Sosnick believes that market volatility may rise sharply again, and investors can profit by buying when the VIX volatility index falls. He said, "If the VIX volatility index falls to around 15 or lower, I would take the opportunity to adopt a 'buying volatility' strategy. In addition, take advantage of the 5% yield that cash can still offer, while focusing on value-oriented stocks, especially those with abundant cash flow, predictable cash flow, and sufficient support for relatively high dividends."

Interest rate-sensitive assets rose last Friday, with the small-cap stock index Russell 2000 up 3.2%. Short-term US Treasury bonds also did the same, with the two-year US Treasury bond yield (inversely related to price trends) falling from 4.02% to 3.91%. Stocks of homebuilders also saw an increase, with the exchange-traded fund SPDR S&P Homebuilders rising by 4.3%. A rate cut will attract homebuyers, making it bullish for homebuilders.

Before the Fed announces the interest rate decision, there are at least two important questions unanswered for investors. The first is whether the Fed will cut rates by 25 basis points or 50 basis points, and investors may get some clues from the speeches of Fed officials and data including the August employment report.

The second question is whether companies can achieve growth through other means to reduce their reliance on the Fed's rate cuts. The most important recent data point is the financial report released this Wednesday.$NVIDIA (NVDA.US)$If Nvidia's financial report this Wednesday indicates that the demand for AI chips is still growing rapidly, then technology stocks may receive another boost, otherwise, the stock market's performance in September this year may not differ much from previous Septembers.

Editor / jayden