September is stereotypically one of the most difficult months for U.S. equities, usually dubbed the worst month for stock returns. As traders look ahead to the next payrolls report, which is due out on Friday of this week, they are already arming themselves against the storm. The Stock Trader’s Almanac reminds us that this month can be particularly brutal for traders. Recent market conditions have confirmed those cries, demonstrating just how brutal the market can be.
U.S. equities are already due for a selloff. This movement is the sound of investor pressure being released from the valve and it reflects rising alarm bells among the investor community. With the backdrop of former President Donald Trump’s ongoing legal battles regarding tariffs, his criticisms of Federal Reserve Chair Jerome Powell, and a reshuffling of the Fed’s board, anxiety has gripped the markets. Traders are abuzz with debate as to what the payrolls report will be. They are very deliberately working through how it will affect future monetary policy.
September’s Historical Weakness
September is typically the worst month of the year for stock traders. It comes with a well-deserved reputation that shapes what they do and how they play their hand. Traditionally, October has been touted as the most bearish month for stocks. Because of this, many investors play it safe around this season. The Stock Trader’s Almanac While perhaps not a necessary read for advanced traders, the Stock Trader’s Almanac provides an anecdotal starting point that highlights this phenomenon.
This historical shortcoming rears its head in many ways, not the least of which are large sell-offs. U.S. equities have recently undergone declines that feel akin to a release valve popping, indicating pent-up selling pressure among investors. As portfolios are trimmed and balance sheets reassessed, many traders are hesitant to commit further capital until clearer signals emerge.
Knowing the cyclical pattern of September puts today’s market action in perspective. Traders don’t have a good track record. This month, they will be much more cautious in their approach to the market and willing to pivot away from their lending plans to adapt.
Anticipation of Payrolls Report
The monthly payrolls report now due Friday is now a key point of focus for traders and investors in equal measure. The report’s frequent use as a tripwire can profoundly affect total market sentiment. Its likely roll-out will be closely watched for new clues to the health of the labor market. Any signs of weakness would only reinforce expectations for a September quarter-point interest rate cut by the Federal Reserve.
It’s no coincidence that traders have already started to price in these expectations, with talk of 2024 cuts starting to get more serious. The barrier to actually fully pricing out a September cut is still incredibly high. Traders may be quick to cheer a cut at first. This decision is born of necessity, and this fact does not inspire confidence that it is heralding any sort of economic recovery.
The implications are profound. If the payrolls report reveals another weak print, it would cement the possibility of monetary easing. A fourth straight month under 100,000 jobs would deliver a definite signal. That would indicate that the labor market is going through its most vulnerable stretch since the pandemic struck. This situation would almost surely exacerbate concerns over recessionary conditions and add greatly to the headwinds of investor sentiment.
Market Reaction and Expectations
As you have seen in the last few days, equities have gingerly reestablished their cadence, supported by dovish hopes as the labor picture has begun to temper. So far, the market has responded with a very tentative bounce that we’d call more a shrug than a shot of adrenaline. This muted response indicates that while traders are hopeful for improvement, they remain acutely aware of the uncertainties that lie ahead.
Fears about the impact of higher yields are still the key overhang on market sentiment. The 30-year yield’s flirtation with 5% is today being treated as a global alarm bell, warning of economic turbulence on the horizon. Investors are looking closely at these developments. Investors are especially focused on Powell’s speech at Jackson Hole, where he hinted that the balance of risks has changed to favor easing.
As traders prepare for the payrolls report and its potential ramifications on monetary policy, the prevailing sentiment is one of cautious optimism tempered by underlying uncertainty. Depending on the market reaction to this report, the result could be very important in determining market directions for the rest of September and into the fall.