Following a robust and consistent rally from May to July, the major U.S. equity indices have retreated, and investors
have been experiencing a choppy period. Stocks first cratered after the Japanese “Yen Carry” trade appeared to unwind. Next, investors tossed out their tech stocks after AI leader Nvidia (NVDA) reported its first margin contraction in ages. However, stocks have rebounded after NVDA CEO Jensen Huang reassured investors that demand was not slowing. Meanwhile, according to Oracle (ORCL) CEO Larry Ellison echoed the demand sentiment and made headlines last week when he divulged that him and Tesla (TSLA) CEO Elon Musk begged Huang to take their money for more AI GPUs.
With the market still choppy, what is the most likely roadmap for stocks moving forward?
September Seasonality Signals Bearish Trends
According to Goldman Sachs (GS) research, the back half of September has the worst historical returns of any part of the year since 1950 with abysmal negative returns for ten out of the last eleven days of the month.
Image Source: Goldman Sachs
Federal Reserve (FOMC) Meeting Impact
Wednesday, the FOMC interest-rate decision will occur at 2:00 pm EST, followed by Fed Chair Jerome Powell’s press conference at 2:30 pm. Recently, Powell confirmed that the Federal Reserve will cut interest rates for the first time since 2020 as the inflation rate declines and the U.S. job market shows signs of slowing. However, there is some uncertainty around the magnitude of the interest rate cut. Investors were expecting a 25-bps cut, but now the market gives a ~60% chance of a 50-bps cut. Meanwhile, Senator Elizabeth Warren demands a 0.75% rate cut (though I find this highly unlikely).
Regardless of the magnitude of interest rate cuts, investors may use the announcement as a “Sell the news” moment.
Triple-Witching Expiration Effects
Triple witching is a phenomenon where stock options, stock index futures, and stock index options expire on the same day. Triple witching occurs four times a year, with one time occurring this Friday, September 20th. Triple witching often induces short term volatility because traders and investors are forced to make decisions about expiring positions.
Bottom Line: Following a solid week of stock gains last week, investors should brace for some potential near-term turbulence as poor seasonality, the interest rate decision, and triple-witching expiration loom.