The poor history of September is hard to ignore, but the market has a lot on its side including the Fed

The bad news is that September is the worst month of the year, but there is plenty of good news to balance out the bad.

September is the worst month of the year for the Dow Industrials, S&P 500, NASDAQ and Russell 2000, according to the Stock Trader’s Almanac.

“While performance often outpaces seasonality, it’s hard to ignore September — it’s just a below-average month,” Frank Gretz of Wellington Shields said in a Friday note to clients.

The last four months have been particularly bad. September was the only month that was lower in each of the last 4 years, our Robert Hum tells me.

S&P 500 in September: It’s been bad lately (round)

• 2023: 5% lower
• 2022: down 9%
• 2021: 5% lower
• 2020: down 4%

The options are wild. Many traders believe that the result will not be known for some time after the November 5th election, adding risk to what is usually the beginning of a strong season.

Seasons aside, the market is booming, and for good reason:

1) The “expansion” of the market is very real. Two-thirds of the S&P 500 had ended in August. The NYSE advance/decline line reached an all-time high. More than 70% of NYSE stocks are above their 200-day moving average. Most importantly, the Equal-Weight S&P 500 (RSP) it modestly outperformed the S&P 500 in August and closed Friday at an all-time high. Megacap Tech didn’t have a bad month, but without Meta it wasn’t a leadership team:

Megacap tech: August deficit

• Up 9.8%
• Apple rose 3.1%
• Nvidia rose 2.0%
• Microsoft fell 0.3%
• Alphabet down 4.5%
• Amazon fell 4.6%

Other sectors were leaders:

Branches in August

• Consumer Prices Rise 5.8%
• Buildings up 5.6%
• Health Care up 5.0%
• Utilities up 4.4%
• Technology rose 1.1%

2) Earnings are always strong. Earnings increased by 13% in the second quarter and are expected to remain strong through the rest of the year.

2024 S&P earnings: still strong

• Q2: up 13.0%
• Q3est. About 5.7%
• Q4 figure: up to 13.5%
• By 2025, up to 15%

Source: LSEG

These numbers have not changed appreciably in several months.

3) Emotions are strong but they are not. A weekly survey of members of the American Association of Individual Investors shows a rise of 51.2%, above the long-term average of 37.5%, but mainly because the number of people who did not take sides they have become hopeful. Bearish sentiment is not far from its historical average.

Bulls vs. Bears

• Bullish: 51.2% (approx. 37.5%)
• Side: 21.9% (approx. 31.5%)
• Bearish: 27.0% (approx. 31.0%)

Source: AAII

4) Inflation is decreasing. July Core PCE, the Fed’s preferred measure of inflation, fell to 2.5%, meeting the Fed’s 2% inflation target.

Another important support for the markets: Expected rate cut by the Fed. In Jackson Hole, chairman Jerome Powell made it clear that the Fed has shifted its focus from fighting inflation to the labor market.

According to CME FedWatch, the majority of traders (69.5%) believe that the Fed will reduce 25 basis points in September, 32% believe that a reduction of 50 points is possible.

It’s understandable that many traders don’t think the Fed needs to be too aggressive though: with the job market still strong, most traders don’t expect the Fed to be aggressive unless it has to be.

“I’m a little worried if they did something more aggressive, like 50 basis points, because I’m worried that market participants might take that as the Fed seeing something alarming in their economic outlook and they move aggressively forward with that,” David Smith, chief investment officer at Rockland Trust, said in an interview with CNBC on Friday.

However, many market watchers believe that any sign of a major recession is likely to be met with further cuts from the Fed.

This belief in the Fed’s “put” helps support the bull’s position that any sell-off on job losses will be short-lived as the Fed helps put a floor under the market.