The September stock market has started weak, as is its usual pattern. Is this due to general market anxiety or is it a self-fulfilling prophecy, considering the recent analysis highlighting September as historically the weakest month for the stock market? Could we be seeing a repeat of the August stock market?
August began extremely weak with significant market declines worldwide. The most striking aspect was the rise in the VIX volatility index for the S&P500 to very high levels. While not as high as during the Covid outbreak or the Lehman crash, this signals that the financial markets are on edge for what’s to come.
There seems to be a battle between economic pessimists and interest rate optimists currently taking place. Weaker than expected economic signals, particularly in the US – such as the July labor market figures and the August industrial purchasing managers’ index – have investors on high alert. Risk appetite took an extra hit in early August when the Bank of Japan raised interest rates.
However, market sentiment quickly turned around when the focus shifted to inflation and interest rates. All it took was positive inflation data for market optimism to return. Although inflation in the US and the Eurozone still has some way to go to reach the target of around 2 percent.
So here we stand at the beginning of autumn.
For economic pessimists, it might be wise to wait before the economic fog clears. Globally, the industrial sector is struggling, and indicators are pointing in the wrong direction. However, the Swedish industry is an exception with a surprising increase in the purchasing managers’ index for August, reaching 52.7, comfortably above the 50-mark indicating growth.
The service sector looks more promising, though not in a boom. The Swedish services index is at 52.8, in line with international standards.
On the interest rate front, a series of rate cuts during September seems likely. The question is how significant these cuts will be. The ECB is expected to cut rates by 25 points, while the Federal Reserve is leaning towards a 50-point cut. The key will be the US jobs report for August due on Friday. Market pricing indicates a total cut of 100 basis points by the end of 2024.
Regarding the Riksbank, we believe rate cuts are imminent due to the expected decrease in Swedish inflation towards 1 percent. Historically, the Riksbank has missed the inflation target downward, and it is unlikely they want to repeat that mistake. The dual rate cut may be delayed until November 6, causing some criticism.
There is a middle ground, though. If the Federal Reserve can smoothly navigate the US economy with reasonable growth and gradual rate cuts, that would be ideal for the market.
Additional stimulus measures in China could also boost the market sentiment in the fall. This is increasingly requested as the Chinese economy shows signs of cooling off after the political leadership lifted Covid restrictions.
If you find this analysis confusing rather than enlightening, you’re not alone. Central banks worldwide rely on incoming data on a monthly basis for their interest rate decisions, which may not have an immediate impact on the real economy due to the time lag in monetary policy transmission. Title: Unleashing the Power of Compound Interest: How Strategic Investments Can Transform Your Financial Future
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