September into October could be bumpy for stocks

We enter September with the three major averages close to or above yearly highs. Momentum is still on the side of the bulls. As such, in the next week or so, markets could attempt to scale those heights and possibly better them.

It is what happens next that concerns me. The next two months are seasonally the worst period for the stock market. However, investors also expect the Federal Reserve Bank to cut interest rates at their meeting on September 17-18. That is normally a bullish development for stocks. We won’t know if the Fed will cut rates, but the markets are betting heavily on that outcome.

The macroeconomic data this week certainly reinforced those expectations. Second quarter GDP was revised upward on the back of higher consumer spending from 2.8% to 3%. This week’s jobless claims were flat versus last week and the Fed’s favorite inflation gauge, the Personal Consumption Expenditures Price Index (PCE), came in line for July with economists’ expectations at 0.2%.

Between now and the FOMC meeting, the only data point that could make a difference to the Feds’ rate decision would be next Friday’s non-farm payroll numbers for August. Recall that the last report spooked investors. The number of jobs decreased by 36.3% versus the month before. Economists were looking for 175,000 job gains but the economy only added 114,000 jobs.

The data sparked fears of a deep recession and calls for immediate rate cuts by the Fed to avert a hard landing. Since then, investors have explained away the sharp increase by blaming the shortfall on Hurricane Beryl, which decimated the Houston job market. If next week’s jobs report does not show another sharp decline, the Fed is expected to cut the Fed Funds rate by 25 basis points.

What concerns me is that several market strategists are expecting an even deeper rate cut by one-half percent, followed by cuts every month for the remainder of the year. In my opinion, they are way over their skies unless the jobs data next week is poor.

In any event, one of the major concerns of investors this week was the fear that a disappointing quarterly earnings result from Nvidia might sink the markets. While the AI leader posted better earnings and sales, it wasn’t enough to satisfy investors. As a result, the company’s stock fell roughly 6% after its earnings announcement, but the markets overall held their own.

There has been a lot of backing and filling in the markets over the last several days. Blame it on the summer doldrums. It feels like the market wants to grind higher, possibly into the FOMC meeting in two weeks. An added variable investors will contend with is politics.

After Labor Day, voters normally begin to pay attention to the upcoming elections. It is a time when political promises come fast and furious as politicians and the media make hay while the sun shines. The combination of negative seasonality and election rhetoric could be ‘a perfect storm’ of volatility for the stock market, especially given the level of gains in the market. Many who follow technical charts are convinced that a pullback will occur. It is just a question of when. I agree.

Bill Schmick is a founding partner of Onota Partners Inc. in the Berkshires. None of his commentary is or should be considered investment advice. Email him at bill@-schmicksretiredinvestor.com.