Seasonal: Bearish. September is the worst month of the year for the DOW, S&P 500, NASDAQ, and Russell 2000. In election years, September’s overall rank improves slightly to third worst month for the DOW, S&P 500, and NASDAQ, fourth worst for Russell 2000. Except for Russell 2000, average performance in election years remains negative.
Fundamental: Adequate. Inflation is slowly cooling, but still above the Fed’s stated 2% target. Unemployment is creeping higher and is currently at 4.3% while apparently 818,000 jobs were revised away. So much for the accuracy of government stats. Economic growth is slowing and the Atlanta Fed’s GDPNow model is forecasting just 2.0% growth in Q3. Corporate earnings for Q2 were broadly better than expected, but there were still some disappointments and Q3 forecasts have been revised lower. Odds for a soft economic landing remain favorable but could quickly fade if data weakens substantially or the Fed delays too long.
Technical: Bouncing. The DOW, S&P 500, and NASDAQ have recovered much of the ground lost in late-July and early August but have stalled below previous all-time highs. Early August lows have not been tested yet. Until the DOW, S&P 500 and NASDAQ break out to new all-time highs, a retest of recent closing lows cannot be ruled out. Levels to watch are around: DOW 38700, S&P 500 5190, and NASDAQ Comp 16200.
Monetary: 5.25 – 5.50%. Chairman Powell’s Jackson Hole speech on August 23rd gave us the most concrete language to date that the Fed is ready to cut. Will it be just a small 0.25% or a larger 0.50% decrease. We will find out on September 18, the next time a Fed meeting ends. Without a crisis or some other calamity, I would bet on the smaller 0.25% cut. There did not seem to be much of a rush by the Fed to increase interest rates when inflation was surging. It seems reasonable that the same lack of urgency is likely with inflation slowly declining and still above 2%.
Sentiment: Neutral. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 50.0%. Correction advisors were at 28.1% while Bearish advisors numbered 21.9% as of their August 21 release. This is a substantial retreat in bullishness from mid/late-July readings and includes a bounce in the percentage of bulls following last week’s gains. Lacking an extreme reading in either direction, sentiment readings currently offer little insight other than the possibility that July’s extreme bullishness marked an interim top.
As I anticipated, the second half of July and early August pullback yielded a rather textbook election year August rally. It has been quite a course correction from the August 5 lows. September seasonal weakness and Octoberphobia looms large. But I have been hearing a lot of chatter about the seasonal troubles this time of year, so my contrary nature tells me that perhaps there is just a bit too much negativity. But with the lack of clarity about the economy, the election, and the Fed’s future moves on interest rates, I still expect some chop and sideways action over the next 60 days or so with a likely test of the August lows. But another steep August-October correction three years in a row is less likely. Bullish election year forces remain at play, but September and October are two of the worst months in election years – even excluding 2008. October is the worst month in election years for the DOW, S&P 500, and NASDAQ.
With all that has transpired in the past month, patience and prudence are clearly in order. In the past month President Biden dropped out. We had a mid-July to early August election year drawdown of 8.5% on the S&P and 13.1% on NASDAQ, culminating in a mini flash crash and turnaround on August 5. Now the steep snapback rally that brought us to within striking distance of the all-time highs for the S&P looks like it’s run its course. Seasonality is coming into its historically weakest period of the year while geopolitics remains tense in Russia and Ukraine, the Mideast, and the Pacific Rim. But macrotrends, technicals, internals, the US economy, and election year forces remain supportive. So be patient, we are well positioned and ready for the fatter pitch later in Q3 or early Q4.
*Source: The Stock Trader’s Almanac