Don't be afraid of the "September curse" in the U.S. stock market! The Federal Reserve may come to the "rescue" soon

According to the Zhitong Finance APP, there is a long-standing saying on Wall Street—backed by decades of data—that September is the worst-performing month for the U.S. stock market throughout the year. However, looking at history, the stock market this month may escape the usual seasonal weakness, as Federal Reserve policymakers seem ready to restart interest rate cuts at the next meeting.

Bloomberg Intelligence strategist Nathaniel Welnhofer stated, "Expectations for a rate cut by the Federal Reserve later this month may help reverse this trend. When the Federal Reserve cuts rates in a non-recession environment, the stock market's returns in September tend to be higher."

Data analyzed by Welnhofer shows that since 1971, the average decline of the S&P 500 index in September is 1%; however, in years when the Federal Reserve cuts rates and the U.S. economy is not in contraction, the index has averaged a 1.2% increase in September. This negative seasonal pattern was last broken last year when the Federal Reserve officials lowered rates by 50 basis points, and the S&P 500 index rose 2% that month.

After the latest employment data was released last Friday, traders were confident that the Federal Reserve would cut rates on September 17. The data showed that the number of new jobs in the U.S. significantly slowed last month, and the unemployment rate rose to its highest level since 2021. Earlier, Federal Reserve Chairman Jerome Powell hinted at this move during a speech at the annual central bank symposium in Jackson Hole, Wyoming, at the end of August.

The market has fully priced in a 25 basis point rate cut this month, and traders are even betting that the Federal Reserve may cumulatively cut rates by 75 basis points from now until the end of the year—including the possibility of a modest 50 basis point cut at the September 17 meeting. This expectation has led to a slight rise in short-term U.S. Treasury bonds, continuing last week's upward trend. Data shows that the yield on two-year U.S. Treasury bonds fell by 1 basis point to 3.50%, having previously dropped to 3.46% last Friday, the lowest since early April.

Current stock market valuations are high, while facing seasonal weakness pressures, and a loose monetary policy will provide important support for bullish investors in the stock market. UBS data shows that September is the only month of the year when the probability of the S&P 500 index declining is higher than that of it rising. Over the past 75 years, this U.S. stock market benchmark index has averaged a decline of 0.7% in September.

Generally speaking, multiple factors contribute to the pressure on the stock market in September: at the end of the quarter, pension funds and mutual funds will rebalance their portfolios; retail buying activity often declines in September; and U.S. companies typically pause stock buybacks before the release of third-quarter earnings (which is an important support force for the stock market).

Bloomberg Intelligence's analysis shows that, apart from 2024, the years when the Federal Reserve implemented loose policies in non-recession periods also include 2019, 2007, and 1995, during which the S&P 500 index rose by 1.7%, 3.6%, and 4% in September, respectively. In contrast, during recessionary periods when rates were cut, the stock market performed much worse: since 1971, the S&P 500 index has averaged a decline of 5% in such cases, with a drop of 11.9% in September 1974 In September 2001, it fell by 8.2%, and in September 2008, it fell by 9.1%.

Although the U.S. economy may not be in recession this time, stock traders still face multiple complex factors that could affect market performance. In addition to a slowdown in the labor market, the impact of U.S. tariff policies on corporate profits remains uncertain; moreover, the current concentration of the stock market is high, with the upward trend mainly relying on a few large technology companies related to artificial intelligence (AI). If this investment theme shows cracks, the benchmark index will face risks. Not to mention, the current inflation rate is still above the Federal Reserve's target level of 2%.

Aaron Nordvik, head of UBS equity macro strategy, stated, "The situation is somewhat complex. Inflation remains a factor hindering the Federal Reserve from significantly cutting interest rates as needed." He added that although the latest government employment data released on September 5 did indeed increase the probability of rate cuts, "this is not an ideal report for risk assets."

"Last Friday's employment data was very disappointing, but the risk of rising inflation still exists," said Michael Brown, senior research strategist at Pepperstone. He added that considering the Federal Reserve will carefully assess the CPI data released this Thursday before next week's meeting, market expectations for rate cuts may be "somewhat premature."

"The current risk balance temporarily leans towards the bearish side, especially if the CPI data released on Thursday reaches or exceeds 3%, which would bring inflationary pressures caused by tariffs back into focus," he stated.

Paisley Nardini, head of multi-asset solutions at Simplify Asset Management Inc., believes that investors should not view weak non-farm payroll data as a reason to bet on rate cuts by buying stocks, but rather should adopt a cautious attitude.

She stated, "If jobs are rapidly decreasing, we should be concerned that consumers will be in trouble." She further pointed out that investors should view increased policy support as a "stopgap measure to cope with an inevitable recession."

Meanwhile, Alexander Altmann, head of global equity tactical strategy at Barclays, presented another viewpoint, arguing that traditional seasonal patterns should no longer be used as a reason to sell stocks.

His calculations show that the average performance of the S&P 500 index in September over the past 20 years has indeed been the worst of the year, with an average decline of 0.65%. However, this data has been severely affected by two major events: the 2008 global financial crisis and the monetary policy tightening in 2022, both of which led to significant declines in the stock market in September of those years. Excluding these shock events, the average increase of the index in September is 0.3%.

He stated, "If we exclude these external events, the performance of the stock market in September is not as bad as it seems on the surface, with an average return still being positive." Although there are indeed adverse factors that may hinder the stock market's performance (including the upcoming inflation data), the view of being bearish on the stock market purely based on seasonal factors is, to some extent, somewhat exaggerated