From the Fed to risks of reaccelerating inflation and a government shutdown, here are the main catalysts that we think will drive markets.
Our Top Market Takeaways for September 08, 2023
Market update
Little fires everywhere
September seems to be picking up August’s angst.
Heading into the weekend, bond yields have continued to swing on a round of hot growth data, and that, combined with word that China is ramping up pressure on Apple, has sent tech stocks and the broader market tumbling. Apple has lost about $200 billion worth of market cap (roughly the size of Netflix!) over the last two trading days.
The gloomy sentiment has only added to frustration that September is historically the worst month of the year for stocks, going back as far as 1950. Those seasonal swings, alongside still pretty full valuations, could mean that stocks continue to gyrate around headlines and too hot or too cold data.
Yet, that may not be a reason to sit on the sidelines. A closer look shows that in the 10 times since 1950 that the S&P 500 has been up at least 10% year-to-date and it’s been down in August (just like this year), September has been higher 8 of those times – with a median return of +2.6%.
Looking back at history, a September like this one might not be so bad
This chart shows returns in years with negative August returns and positive YTD returns through August. In 1954, the YTD return through August was 20.2%, the August return was -3.4%, the September return was 8.3%, and the September-December return was 20.6% In 1955, the YTD return through August was 20%, the August return was -0.8%, the September return was 1.1%, and the September-December return was 5.3% In 1967, the YTD return through August was 16.6%, the August return was -1.2%, the September return was 3.3%, and the September-December return was 3% In 1975, the YTD return through August was 26.7%, the August return was -2.1%, the September return was -3.5%, and the September-December return was 3.8% In 1976, the YTD return through August was 14.1%, the August return was -0.5%, the September return was 2.3%, and the September-December return was 4.4% In 1985, the YTD return through August was 12.8%, the August return was -1.2%, the September return was -3.5%, and the September-December return was 12% In 1995, the YTD return through August was 22.3%, the August return was 0%, the September return was 4%, and the September-December return was 9.6% In 1997, the YTD return through August was 21.4%, the August return was -5.7%, the September return was 5.3%, and the September-December return was 7.9% In 2013, the YTD return through August was 14.5%, the August return was -3.1%, the September return was 3%, and the September-December return was 13.2% In 2019, the YTD return through August was 16.7%, the August return was -1.8%, the September return was 1.7%, and the September-December return was 10.4% In 2023, the YTD return through August was 17.4%, the August return was -1.8%. The median September return was 2.6%, and the median September-December return was 8.8%. 80% of September returns were higher, and 100% of September-December returns were higher.
Looking into the final months of the year, a number of catalysts are on the horizon – and could give markets the push they need to find direction. Today, we explore 5 we’re focused on.
Spotlight
Catalysts through year-end: 5 things to watch for
1) Inflation: Could it be reaccelerating?
Some wonder if progress could be petering out – especially as segments like energy and core goods (which led the bulk of the price declines over the last year) are showing some signs of reaccelerating.
The next few reports will probably show inflation tick higher, and that may reignite some nerves. But, we don’t think it’s enough to offset the larger trend of cooler prices. Rent prices still have a lot of progress to make, and softer wage growth should help temper inflation in other core services (like education and hospitality) that have been especially sticky.
We’re seeing some signs of this already: The rate of those voluntarily leaving their jobs (the quits rate) has fallen back to where it was before the pandemic. And just this week, Walmart, which is the largest private employer in the world, said its cutting pay for some entry-level workers.
What to watch: Looking to next week’s U.S. CPI print, a bigger headline inflation number may dominate the tape, but the balance under the surface will be key. How much will disinflation leaders reaccelerate? And how quickly will sticky pockets come back down?
2) The Fed: Will it signal rate cuts?
The debate around “is the Fed done?” seems exhausted. Whether the U.S. central bank pauses or has another hike left, the market’s expectation for the Fed’s “terminal” rate has hardly moved all summer.
The real question is how long a pause might last, and when and how quickly policymakers can start cutting rates. Just two months ago, investors were betting on Fed funds finishing 2024 around 3.75%; now, that stands around 4.40% (suggesting 65bps fewer cuts than before, with the first cut not coming until summer).
There’s some reason to believe it could potentially be on the earlier side. If inflation continues to cool at the same time the Fed holds rates, this means the real policy rate (the nominal policy rate minus inflation) is getting more restrictive without the Fed doing anything at all. That means just to keep rates as restrictive as they are today, the Fed would need to cut.
Even as the Fed pauses, rates could remain restrictive
The chart describes the real Fed funds rate (Fed funds rate minus core PCE inflation) in %. The first data point came in at 4.7% in January 1990. It went all the way down and bottomed at 0.2% in August 1993. It went up, stabilized and peaked at 4.8% in June 2000. Then it declined dramatically and fell to -1.0% in May 2004. Later it went back up again to 3.3% in August 2007. Then it went back down and troughed at -1.8% in February 2012. Then it slowly rose and peaked at 0.8% in May 2019. It then sharply fell to -5.2% in February 2022. Soon after it ramped up to 1.3% in July 2023. There are also recession bars throughout the chart (greyed out area) The first recession bar started in July 1990 and ended in March 1991. The second recession bar started in March 2001 and ended in November 2001. The third bar started in December 2007 and ended in June 2009. The last recession bar started in February 2020 and ended in April 2020.
What to watch: The Fed’s 2024 dot at its meeting on September 20th. Right now, it’s at 4.625%, signaling even less cuts than the market.
3) Earnings: The push of costs vs. the pull of demand
The latest earnings season was better than expected, and the Street sees even greener pastures ahead: Expectations for S&P 500 earnings for the next 12 months are pretty much back to where they were last summer. To us, such strong earnings make otherwise full valuations for stocks look worth it.
Earnings expectations have marched higher
The chart describes the S&P 500 next 12 months earnings per share (EPS) estimates in $. The line started at $222.3 on December 30, 2021. It went all the way up and peaked at $238 on June 23, 2022. Then it went all the way down and troughed at $223 on February 23, 2023. Then it went back up again and reached $236 on September 7, 2023.
But there are still risks. The Fed’s latest Beige Book, which surveys dozens of district banks, noted that more companies seem to be struggling to pass their own costs onto their customers.
What to watch: Stronger earnings are surely welcome, but margins (which measure the degree to which sales become profits) also matter. Seeing margins stabilize (after declining steadily since 2021) could offer an encouraging sign.
Could profit margins be stabilizing?
This chart shows S&P 500 net profit margins from Q2 2018 to Q2 2023 (Q2 2023 value is estimated from FactSet). In Q2 2018, the net profit margin was 11.6% In Q3 2018, the net profit margin was 11.9% In Q4 2018, the net profit margin was 11.1% In Q1 2019, the net profit margin was 11.0% In Q2 2019, the net profit margin was 11.4% In Q3 2019, the net profit margin was 11.4% In Q4 2019, the net profit margin was 10.8% In Q1 2020, the net profit margin was 9.2% In Q2 2020, the net profit margin was 8.5% In Q3 2020, the net profit margin was 10.8% In Q4 2020, the net profit margin was 10.9% In Q1 2021, the net profit margin was 12.7% In Q2 2021, the net profit margin was 13.0% In Q3 2021, the net profit margin was 12.8% In Q4 2021, the net profit margin was 12.4% In Q1 2022, the net profit margin was 12.3% In Q2 2022, the net profit margin was 12.2% In Q3 2022, the net profit margin was 11.9% In Q4 2022, the net profit margin was 11.2% In Q1 2023, the net profit margin was 11.5% In Q2E 2023, the net profit margin was 11.1%
4) Capex: Can momentum continue?
The U.S. economy’s strong showing this year has been partly in thanks to government policies focused on reviving America’s industrial heartbeat – together, the 2021 Infrastructure Investment and Jobs Act (IIJA), the 2022 Inflation Reduction Act (IRA), and the 2022 CHIPS and Science Act (CHIPS) include almost $2.4 trillion in funding.
Now, that, combined with ongoing reshoring and investment in the energy transition, is translating into real company spending on infrastructure, AI, and the like. Rounding out Q2 earnings season, over 60% of S&P 500 companies increased capex over the last year. Can more join in?
Why it matters: There’s a big debate over whether all this capex is a sign that the economy might be getting more productive. If it is, it could level-up future growth.
5) Washington: Is there risk of a government shutdown?
Congress has to pass a short-term spending deal (a “continuing resolution”) by midnight on September 30th to keep the government’s lights on. The House comes back from its summer recess on September 12th, leaving just about three weeks to get an agreement in order.
Without it, all “nonessential” departments—like the Environmental Protection Agency, the Labor Department, and parts of the IRS—will be forced to power down. In essence, the government “shuts down.”
We’ve seen a handful of government shutdowns before, with the longest in 2018 (which lasted over a month). But, while the impact grows the longer it lasts, the hit to growth and stocks is typically short-lived. Looking at the last 20 government shutdowns (from the time they started to ended), U.S. stocks have actually been about flat on average.
On average, stocks tend to be mixed during government shutdowns
The chart shows the S&P returns during prior U.S. government shutdowns.
Dec. 21, 2018 – Jan. 25, 2019: 8%
Jan. 19, 2018 – Jan. 22, 2018: 1.2%
Sep. 30, 2013 – Oct. 17, 2013: 2.4%
Dec. 15, 1995 – Jan. 06, 1996: 0.0%
Nov. 13, 1995 – Nov. 19, 1995: 1.2%
Oct. 05, 1990 – Oct. 09, 1990: -2.4%
Dec. 18, 1987 – Dec. 20, 1987: 2.5%
Oct. 16, 1986 – Oct. 18, 1986: 0.0%
Oct. 03, 1984 – Oct. 05, 1984: -0.6%
Sep. 30, 1984 – Oct. 03, 1984: -2.2%
Nov. 10, 1983 – Nov. 14, 1983: 1.6%
Dec. 17, 1982 – Dec. 21, 1982: 2.4%
Sep. 30, 1982 – Oct. 02, 1982: 0.3%
Nov. 20, 1981 – Nov. 23, 1981: 0.7%
Sep. 30, 1979 – Oct. 12, 1979: -4.4%
Sep. 30, 1978 – Oct.18, 1978: -2.0%
Nov. 30, 1977 – Dec. 09, 1977: -1.0%
Oct. 31, 1977 – Nov. 09, 1977: 0.4%
Sep. 30, 1977 – Oct. 13, 1977: -2.5%
Sep. 30, 1976 – Oct. 11, 1976: -3.5%
Average: -0.3%
What to watch: A deeply divided Congress makes things more difficult, and some policymakers seem to be demanding concessions before approving a plan.
Investment implications
We still see the potential
At the start of the year, we asked investors to see the potential for stronger markets, and so far, even amidst a flurry of risks and bouts of volatility, that’s tracked.
Global stocks are up +15% year-to-date, while global bond returns (-0.6%) have been tougher as yields have climbed. But together, a 60/40 portfolio has returned almost +10% – well above the 7.2% annual return our Long-term Capital Market Assumptions (which estimate returns for the next 10-15 years) would typically expect.
Despite all the swirl, markets have powered through
This chart shows 2023 YTD and summer returns in USD terms, with summer defined as May 31, 2023 to September 7, 2023. For U.S. stocks, the YTD return was 17.3% and the summer return was 6.3%. For World stocks, the YTD return was 15.1% and the summer return was 4.8%. For Europe stocks, the YTD return was 10.5% and the summer return was -0.3%. For the 60/40 portfolio, the YTD return was 8.6% and the summer return was 3.5%. For U.S. Corporate HY, the YTD return was 6.7% and the summer return was 2.9%. For EM Equity, the YTD return was 4.2% and the summer return was 1.7%. For USD Cash, the YTD return was 3.4% and the summer return was 1.5%. For U.S Agg. bonds, the YTD return was 0.5% and the summer return was -1.6%. For U.S. Treasury, the YTD return was -0.1% and the summer return was -2.1%. For Global Agg. Bonds, the YTD return was -0.6% and the summer return was -1.9%. For Commodities, the YTD return was -2.7% and the summer return was 9.4%. For China stocks, the YTD return was -5.0% and the summer return was 2.5%.
To us, that means the 60/40 is back, and today’s market offers an opportunity to rebuild and strengthen your core for the months ahead.
Your J.P. Morgan team is here to help.
All market and economic data as of September 2023 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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