The stock market began September with a major downturn as weak manufacturing data once again reminded investors that "bad news is bad news." The S&P 500 fell over 2%, while the Nasdaq saw a sharp 3.3% drop, marking the worst percentage loss for both indices since early 2020. With manufacturing data continuing to show signs of contraction, many are wondering whether a September selloff could be on the horizon.
Key Takeaways:
S&P 500 and Nasdaq fall sharply, triggering concerns of a potential September selloff.
Weak manufacturing data continues to show contraction in the U.S. economy.
The Federal Reserve may cut interest rates to stabilise the market, but skepticism remains.
Investors are closely watching Friday’s Non-farm Payrolls report for more economic insights.
September Selloff Kicks Off with Weak Manufacturing Data
The Institute for Supply Management’s (ISM) Manufacturing Index for August revealed that U.S. manufacturing activity remains sluggish, contracting for the fifth consecutive month. Although there was a slight rebound from July's eight-month low, the index's reading of 47.2 was still below the 50 threshold, which indicates contraction. This weak performance has reignited fears of a continued market downturn as September, historically the worst month for stocks, begins.
As investors digest the latest economic data, the likelihood of a September selloff grows. Historically, September is known for poor stock market performance, with some of the largest monthly declines recorded in years like 1931 and 2008. Market sentiment remains cautious, particularly with Friday’s highly anticipated August Nonfarm Payrolls report set to provide additional insights into the state of the U.S. economy.
Will Rate Cuts Reverse the Trend?
The ongoing weakness in manufacturing has led some market analysts to speculate that the Federal Reserve may intervene with interest rate cuts to stimulate economic activity. According to the CME FedWatch tool, the chance of a 25 basis point rate cut in September is now at 61%, while the odds of a more aggressive 50 basis point cut stand at 39%.
While some investors believe that the Fed’s intervention could provide a short-term boost to the market, others remain skeptical. Historically, rate cuts during periods of prolonged economic weakness can lead to temporary rallies but fail to reverse deeper systemic issues.
What’s Driving the Market Down?
Several factors are contributing to the market’s downturn. Alongside weak ISM data, first-time jobless claims and a softer-than-expected July jobs report have added to the uncertainty. Additionally, the recent downturn in U.S. manufacturing has raised concerns about the broader economy's resilience, particularly as global trade tensions and inflationary pressures persist.
Moreover, the market’s sensitivity to disappointing data is amplified by stretched valuations and high investor expectations. The S&P 500 and Dow had been closing in on all-time highs by the end of August, underlining the potential for sharp corrections when faced with bad news.
Historical Patterns: September’s Stock Market Struggles
September has long been viewed as a problematic month for the stock market. According to historical data, it’s the only calendar month that has averaged a negative return over the past 98 years. Many analysts attribute this trend to factors such as post-summer portfolio re-balancing, an uptick in bond offerings, and mutual fund tax maneuvers.
While the exact causes remain debated, the trend is clear—September is often a volatile period for equities. The current downturn, coupled with ongoing economic concerns, has heightened fears that 2024’s September selloff could mirror the severe declines seen in years like 2008 and 1931.
Investor Sentiment and What to Watch
As the market reacts to the latest data, investors are closely watching key indicators to gauge the likelihood of further declines. Friday’s Nonfarm Payrolls report will be critical in shaping the market’s trajectory, as it could provide further clarity on the health of the labor market and the potential for additional rate cuts.
With a topsy-turvy presidential election on the horizon and economic data indicating continued weakness, investors are treading carefully. Those looking for safe havens may turn to assets like gold, which has historically performed well during periods of stock market volatility.
Conclusion
As September begins, the stock market has already been hit with a sharp selloff following weak manufacturing data. With investor sentiment cautious and historical patterns suggesting further declines, all eyes are on the Federal Reserve and upcoming economic reports. Whether the market can recover or if the September selloff will deepen remains to be seen.
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