S&P 500 Sees Biggest Slide Since August Meltdown

“We are not out of the woods yet,” Matejka wrote in a note, reiterating his preference for defensive sectors against the backdrop of a pullback in bond yields. “Sentiment and positioning indicators look far from attractive, political and geopolitical uncertainty is elevated, and seasonals are more challenging again in September.”

September has been the biggest percentage loser for the S&P 500 since 1950, according to the Stock Trader’s Almanac. A contrarian sentiment gauge from Bank of America Corp. rose to its highest level in nearly two and a half years last month — creeping closer to a “sell” signal for U.S. stocks.

“For all years since World War II, August and September saw the S&P 500 endure a double-dose of declines,” said Sam Stovall at CFRA. “Yet history now advises investors to fasten their safety belts, since during election years, this sequential seasonal slippage has shifted to September and October.”

Rich Ross at Evercore says the S&P 500 has had at least a 5% drawdown from the August/September highs in nine of the last 10 years.

“This year should be no different after the late August squeeze into resistance at an all-time high,” Ross noted. The S&P has a strong downside bias buttressed only by a bent towards ‘low volatility’ defensives and financials — which benefit from lower rates and steeper curves.”

“A key lesson from the last few weeks is that big-tech stocks have not proven defensive during the recent market pullbacks,” said Philip Straehl at Morningstar Wealth. “While there is little evidence of a slowdown in AI spending, valuations have set a high bar for incoming corporate and macro data.”

Traders are projecting the Fed will cut its rate by a full percentage point by the end of the year, implying an unusually large half-point reduction at one of the three meetings left in 2024.

What’s more, they are anticipating that the central bank will reduce its benchmark rate by more than two full percentage points over the next 12 months, which would be the steepest drop outside of an economic downturn since the 1980s.

“The Fed is finally coming around to cutting rates, but it does not feel like stringing out a bunch of 25 basis-point rate cuts will do the job,” said Neil Dutta at Renaissance Macro Research. “That muddling through scenario will probably risk further increases in the unemployment rate. So, if they aren’t going 50 in September, they are going to need to go 50 at some point later this year.”

Marking the start of a busy week for economic data, a report showed U.S. manufacturing activity shrank in August for a fifth month.

This coming Friday, the August jobs report is expected to show payrolls in the world’s largest economy increased by about 165,000, based on the median estimate in a Bloomberg survey of economists.

While above the modest 114,000 gain in July, average payrolls growth over the most recent three months would ease to a little more than 150,000 — the smallest since the start of 2021. The jobless rate probably edged down in August, to 4.2% from 4.3%.

U.S. interest-rate strategists predict a bigger market reaction if Friday’s August employment data is weaker than anticipated, according to the limited quantity of weekly research reports published around the holiday weekend.

“With the Fed likely to begin its rate cutting cycle in September, investors should consider extending duration now in high-quality fixed income to capture potential gains,” according to Principal Asset Management.

“Historically, bond yields drop ahead of Fed rate cuts, offering a window of opportunity to enhance returns without waiting for official policy shifts. Positioning in longer-duration assets now can provide income stability and potential price appreciation in a slowing economy,” it stated.

(Adobe Stock)