Stocks are entering their worst time of the year ever, and this could be especially difficult as the market is hovering over the prospect of further Fed action. The S&P 500 index fell 0.56% on average in September, according to the CFRA, linked to World War II. In September, the index was negative 56% of the time, but this led the market to rise by an average of 0.9% in October. November and December were positive for the S&P with average gains of 1.4% and 1.6% respectively, the CFRA found. Stocks come out of August with losses. The S&P 500 was down about 3.5% on the month as of Tuesday’s close and more than 7% from this month’s summer high. The index remained virtually unchanged on Wednesday. “I think we need a good shake-up, probably approaching the 3800 level,” said Sam Stovall, chief investment strategist at CFRA. He noted that the S&P 500 was up 17.4% from its June low before failing to break above its 200-day moving average on August 16. and this is seen as a positive indicator of momentum if it can be surpassed. “I think we could retest the lows and right now I think the lows will hold,” he said. On June 17, the S&P hit a low of 3636. This week, the index fell below its 50-day moving average for the first time since July 26. presidential election years, when the stock market sells off heavily in September and October before recovering in the last quarter of the year. A negative September would be in line with this forecast, with the Fed adding to volatility with its hawkish stance. “I think investors are questioning their core thesis right now,” Stovall said. He said Fed Chairman Jerome Powell, in his speech at Jackson Hole on Friday, discouraged expectations that the central bank will cut rates sharply after it stops raising interest rates next year. New York Fed President John Williams reinforced that view on Tuesday when he said the Fed would raise rates and keep them high to fight inflation. The Fed will meet again on September 20 and 21, and odds in the futures market point to another three-quarter point rate hike at that meeting. Strategists are anticipating volatility in the upcoming employment and inflation data, which will help Fed officials determine whether to raise rates by 0.75 percentage points or the 0.50 percentage points expected by some economists. Friday’s August employment report could be critical. Economists expect 318,000 jobs to be added, up from 528,000 in July, according to Dow Jones data. Also important will be the consumer price index, published on 13 September. “Ultimately we are looking at how the Fed is looking at incoming data. Patrick Palfrey, Senior Equity Strategist at Credit Suisse and Co-Head of Quantitative Research, said. The employment data for August is notorious for its volatility. ADP’s latest report, released on Wednesday, showed just 132,000 jobs added in the private sector. “Volatility is the buzzword… that makes Friday’s payroll very important,” wrote Julian Emanuel, head of equities, derivatives and quantitative strategy at Evercore ISI. A report below consensus could have helped the stock market, but he added that a “hot number” of 450,000 or more could send shares lower. do,” Palfrey said. Not only do higher prices need to come down, but inflation expectations need to come down for the Fed to become less hawkish. Palfrey said a retest of the low is possible. already out of the market,” he said. He added that the S&P 500 is now trading at about 16 times its gains, compared to about 21.5 times its gains. He noted that the barrier to the market would be profits, and “they” we began to fall. The recession worries, Palfrey said, that profits will drop sharply as the economy approaches recession, and this is one of investors’ biggest fears. This could make a Q4 market recovery less likely. “What is tricky is the idea that a recession is just around the corner. Many industrial variables look pre-crisis,” he said. Palfrey said that while monthly employment reports were solid, the rise in weekly jobless claims could be an early warning of a recession. “The idea that the environment appears to be pre-crisis and historically hawkish Fed policy or Fed rate hikes typically preceded recessions will remain part of the conversation later this year and early next year,” he added. That could make it difficult for stocks to rise, he said, especially if profits are under pressure and carry forward. Another problem for equities is likely related to the fixed income market, where rates are rising. The yield on 10-year bonds was 3.1% on Wednesday after being below 3% for much of July and August. “It is likely that rates and yields will rise, so stocks are likely to continue to explore the lower end of the range. It’s September after all,” Evercore’s Emanuel wrote. The strategist said he expects volatility in both directions and he is not bearish. First, he expects European natural gas prices to peak. He also notes that an inverted Treasury yield curve, in which 2-year yields are much higher than 10-year yields, could be a recession warning. But in 1998, for example, it took three years for a recession to set in after the yield curve inversion. “The key will be whether the consumer continues to spend money or after the first ‘nearly normal’ summer in 3 years, the spending tap closes,” Emanuel said. Where to Invest Credit Suisse’s Palfrey also stressed that rising rates in the fixed income market could add to volatility. “It’s an ecosystem. There is a splash in one part of the pond and it is rippling everywhere,” he said. “If you think we’re in a pre-crisis period, you’ll want to switch to quality stocks… health care, staples, defensive sectors. These are areas where there is a chance to excel.” Palfrey said high-end, high-yield technology is also an area he would look at, but overall the sector could be in trouble. “I think technology is in a difficult position. It goes back to what’s happening with interest rates. What happens to the cost of capital and, in fact, their rate of return,” he said. CFRA’s Stovall said the best-performing sub-sectors of the S&P since the Aug. 16 high were energy, independent power producers and fertilizers. Of the major sectors, only energy continued to rise after the mid-August peak, and it performed best in August. The S&P Energy Select Sector SPDR ETF, or XLE, reflects this sector and is up 3.9% in August and 46% in a year. Stovall notes that, historically, energy, utilities, healthcare and communications have been the top performing sectors in terms of growth in September. These sectors have grown by at least 60% in September since 1995. Utilities are up more than 4% year-to-date. Healthcare fell about 11% and consumer goods fell over 4%. Evercore ISI warns that defensive trading could be excessive, especially in the utilities sector, the only sector to hit a new high since June. Emanuel notes that prices are high in this sector, and the dividend yield is close to a 20-year low. The Utilities Select Sector SPDR Fund ETF reflects this sector. “As the S&P 500 Utilities Index has the potential to create a ‘double top’ near the top of its post-pandemic trend channel, the risk/reward outlook is skewed towards more risk, less reward,” Emanuel wrote. In the S&P subsectors, shoe, restaurant and property casualty insurance companies performed well in September, Stovall said. He added that these corners of the market were higher 70% of the time.