Summer has come and gone, and as usual it went by too quickly. In that time, markets experienced elevated volatility as investors eagerly anticipated the Fed’s next move. Markets are certainly expecting a rate cut on September 18th, the question remains just how big a cut will occur. A modest 25 basis point reduction was the initial projection, but that has evolved into more of an aggressive cut of 50 basis points as the economy shows signs of slowing, especially concerning employment.
Assuming the Fed does indeed cut rates this month, as I’ve written in the past, declining interest rates are most frequently not bullish for equities. All too often, the Fed is “behind the curve” in its actions, preferring to wait for conclusive evidence instead of taking any anticipatory policy moves. As a result, by the time the Fed starts cutting rates, the economy is already faltering and worrying investors, which supersedes any stimulative effects from the rate cuts.
Also, as I’ve previously discussed, the yield curve inverting is an excellent heads-up signal that a recession is in the offing. However, as shown in the chart below, a more prescient warning sign comes when the yield curve un-inverts or begins to rise and get above zero.
The chart displays the 10Y/2Y yield curve and economic recessions (blue shading) dating back to 1967. The red circles indicate when the yield curve is inverted (descended below zero). Notice that a recession typically follows when the yield curve begins to rise (un-inverts) towards and above zero. And as you can see, the yield curve is currently un-inverting and rising, which does not bode well for the economy, or equities.
In addition, seasonality is another factor that is working against stocks at this point. Studies show that September is unequivocally the worst calendar month for equities. Unfortunately, the fact that 2024 is a presidential election year does not change that seasonal tendency.
The exhibit above displays the performance of the S&P 500 by calendar month during election years only, dating back to 1950. Both September and October are decidedly weak performers, likely due to concerns about the upcoming election outcome combined with what already tends to be a weak period for stocks during any calendar year.
We remain cautious and defensively positioned as we anticipate heightened market volatility to continue soon. Needless to say, we continually monitor and make any needed adjustments within the ebbs and flows of the economic reach out cycle.
As always, please do not hesitate to contact us with any questions or concerns. Thank you for entrusting us with your financial management needs and goals.
Edward Miller, CFA, CMT
Chief Investment Officer
Measured Wealth Private Client Group
Important Disclosures
Historical data is not a guarantee that any of the events described will occur or that any strategy will be successful. Past performance is not indicative of future results.
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