Wall Street Week Ahead: U.S. summer stock rally at risk as September
looms
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[August 26, 2022] By
David Randall
NEW YORK (Reuters) - The 13% rally in the
S&P 500 from its June lows will soon run into what has historically been
the toughest month for the U.S. stock market, sparking nerves among some
fund managers of a broad selloff in September.
The S&P has been in a bear market since plummeting early this year as
investors priced in the expectation of aggressive Federal Reserve
interest rate hikes, but has rallied strongly since June, regaining half
its losses for the year.
That rebound has been fueled by a combination of strong earnings from
bellwether companies and signs that inflation may have peaked,
potentially allowing the Fed to slow rate hikes.
But as investors and traders return from summer holidays, some are
nervous about a bumpier ride in September, partly due to seasonal
concerns and partly due to nervousness about the Fed's pace of hikes and
the resulting impact on the economy.
September typically is a down month for the stock market because fund
managers tend to sell underperforming positions as the end of the third
quarter approaches, according to the Stock Trader's Almanac.
"We’ve had a breathtaking run and I wouldn’t be shocked if the market
takes a hit here," said Jack Janasiewicz, lead portfolio strategist at
Natixis Investment Management Solutions.
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The S&P 500 could fall by as much as 10% in September as investors price
in the likelihood that the Fed will not start to cut rates as early as
some hoped, Janasiewicz said.
September has traditionally been the worst month for the S&P 500 in the
years since 1945, with the index advancing only 44% of the time, the
lowest of any month, according to CFRA data. The S&P 500 has posted an
average loss of 0.6% in September, the worst showing of any month.
The index is down 13.1% for the year to date. That performance has been
helped by a nearly 14% gain since June, when the index hit its lowest
level since Dec. 2020 and entered a bear market after the Fed announced
its largest rate hike since 1994.
Chief among the reasons for the gloomy outlook is a belief that the Fed
will continue hiking interest rates and will keep them above the neutral
rate longer than markets had anticipated as recently as a week ago,
weighing on consumer demand and the housing market.
Nearly half of market participants now expect the fed funds rate to move
above 3.7% by the end of the year, up from 40% a week ago, according to
the CME FedWatch tool [/FEDWATCH]. The fed funds rate is currently
between 2.25 and 2.5%.
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Raindrops hang on a sign for Wall Street
outside the New York Stock Exchange in Manhattan in New York City,
New York, U.S., October 26, 2020. REUTERS/Mike Segar
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When Fed Chair Jerome Powell speaks on Friday, market participants will be eager
for any hints about how long the central bank anticipates hiking rates. Powell,
who is making a keynote speech at the Kansas City Federal Reserve's annual
monetary policy conference in Jackson Hole, Wyoming, may use the opportunity to
cool expectations among investors of cuts to borrowing costs in 2023.
The FOMC meeting scheduled for Sept. 20 and 21 will also likely drive volatility
during the month, prompting the S&P 500 to fall near its June lows, said Sam
Stovall, chief investment strategist at CFRA. Ahead of that will be critical
economic data, such as a reading on consumer prices that will give investors
more insight into whether inflation has peaked.
The strong rally since June, however, suggests that the index will continue to
rebound through December, Stovall said.
"While we might end up retesting the June low, history says that we will not set
a new low," he said.
While fund managers as a whole remain bearish, the ratio of bulls to bears has
improved since July, reducing the likelihood of outsized gains in the months
ahead, according to Bank of America survey released Aug. 16. The bank's clients
were net sellers of US equities last week for the first time in 8 weeks,
suggesting that investors are growing more defensive, the bank said.
At the same time, the use of leverage by hedge funds - a proxy for their
willingness to take risk - has stabilized since June and is now near the lowest
level since March 2020, according to Goldman Sachs.
Investors may continue to rotate out of cyclical, value-oriented stocks that
benefit from rising inflation and into technology and other growth stocks that
can take market share despite an economic slowdown as the Fed continues to
emphasize that it will maintain rates until they see signs of the labor market
cooling, said Tiffany Wade, senior portfolio manager at Columbia Threadneedle
Investments, who is overweight mega-cap stocks like Amazon.com and Micrsoft
Corp.
"We expect the pullback will start with some of the riskier names that have run
up a lot since June," she said.
(Reporting by David Randall; editing by Megan Davies and Chizu Nomiyama)
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