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Point of View · 09.04.24

Volatility Strikes in September: Our Thoughts

We think the decline in the S&P 500 Index on Tuesday may be more technical than fundamental.

  • Volatility & Risk
  • Equity Insights

Key Points

What it is

We analyze the S&P 500 Index’s 2.1% drop on Tuesday.

Why it matters

Some volatility has started to show up amid a prolonged gain for U.S. equities.

Where it's going

We believe that investors should focus on the broader economic backdrop, which we think remains constructive overall.

After posting nine winning months out of the past 10 for a cumulative gain of 36%, the S&P 500 started September with a 2.1% decline on Tuesday. September has historically been a weak month for the S&P 500 and after rallying 9.1% off the early August lows, we think some pullback was likely to occur.

 

Overall, we interpret Tuesday's volatility as profit-taking from the rise of companies buoyed by artificial intelligence businesses and risk rebalancing rather than anything fundamental. So we could have similar days like this going forward, even in the absence of a fundamental catalyst. The biggest downward moves came from the AI adjacent space — the tech-heavy “Magnificent 7” (Nvidia, Apple, etc.) fell 3.8% and the semiconductor industry declined 8.4% with every stock in the industry down at least 5%. This spilled over into other cyclical segments of the economy including industrials, energy, and materials, all down at least 2%.

 

Meanwhile, defensive sectors fared relatively well with consumer staples the lone winner for the day, with utilities, real estate and health care sectors also outpacing the broader market. This supported more of a risk-off narrative with yesterday marking the second volatility spike in the last month. Outside of equities, the 10-year Treasury yield fell yesterday and credit spreads widened. However, the reaction was much more subdued than what we saw in equity markets, indicating bond markets were not overly perturbed by yesterday’s moves. Again, this supports that the equity downturn was more technical than fundamental.

 

 

Our Tactical Outlook

 

Looking past yesterday’s market action, we maintain a soft landing base case for the U.S. economy with growth remaining below trend but positive, supported by ongoing economic strength and labor markets consistent with this view. Recent data including better-than-expected economic growth in the U.S. along with second quarter earnings growth of more than 10%. Earnings growth was seen across most sectors which helps support this case.

 

From an interest-rate perspective, we think Federal Reserve Chair Jay Powell’s August 23 statement that “the time has come for policy to adjust” clearly signals a shift towards the full employment as part of the Fed’s dual mandate and the start of a rate cutting cycle in September. Investors are now debating whether the first move will be for 25 basis points or 50 basis points, with Friday’s labor data shedding some light on the potential magnitude of the first cut. Consistent with an economic soft-landing narrative, our view is that rate cuts should be construed as a mid-cycle adjustment, rather than something more serious.

 

 

Focus on the Broader Economic Backdrop

 

However, heightened volatility overall can be expected during Fed rate cutting cycles, especially given a range of opinions on the magnitude, pacing, and interpretation of the Fed response. How this plays out on a day-to-day basis in markets is difficult to know, and the higher volatility suggests wider swings in both directions. We believe it is important not to be too reactive to these types of short-term gyrations and focus on the broader economic backdrop, which remains constructive overall.

Main Point

Economy Likely Still Supports Market

The drop in U.S. equities on Tuesday appears to be more technical than fundamental, a slip from a prolonged market rally. We believe it is important not to be too reactive to these types of short-term gyrations and focus on the broader economic backdrop, which remains constructive overall.

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