Can stocks receive a lift in September? This week’s economic releases may provide some clues

ANTHONY SAGLIMBENE – CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL

WEEKLY MARKET PERSPECTIVES — August 28, 2023

Investors refrain enthusiasm around strong NVDIA earnings results

Interestingly, most investors would assume such positive results would be greeted warmly by investors and help lift sentiment not only in NVIDIA’s stock but also in the other mega-cap tech stocks that have fueled this year’s stock rally. However, after an initial pop higher, the stock finished the week well off its best levels, while the other big tech stocks in this year’s rally failed to see any meaningful tailwind from the positive AI takeaways. Profit-taking in NVIDIA, stretched valuations across the mega-caps, weak seasonality factors heading into September, anxiety over Fed Chair Powell’s speech, or elevated interest rates — whatever the reason — investors refrained from becoming too enthusiastic about NVIDIA’s results last week.

Also helping to mute stock momentum more broadly last week were the overall messages from a batch of retail earnings reports, which weren’t necessarily favorable for growth. Foot Locker and Williams-Sonoma said consumer trends remain uncertain in the second half, while Dick’s Sporting Goods cut its annual profit forecast. Although Macy’s beat profit estimates for the second quarter, it warned weakening demand and faster-than-expected delays in credit card payments were a concern. Notably, holiday sales in the back half of the year could see more pressure from cost-conscious consumers, particularly among higher-income shoppers, which could pressure profit margins. Although Retail is a fickle, case-by-case industry that’s hard to tie overall macro trends to, some of last week's commentary from the industry group was less than inspiring regarding the consumer.

Powell drives home Fed's message of a higher-for-longer rate environment

On the Fed front, Fed Chair Jerome Powell delivered an on-point, as-expected speech at this year’s Kansas City Fed’s Jackson Hole Economic Symposium. Mr. Powell said the Fed is prepared to raise rates further if necessary and intends to hold rates at a restrictive level until the committee is confident inflation will be sustained at its 2% target. But while the Fed Chair essentially reiterated messages from the July FOMC meeting and warned persistently above-trend growth could risk further tightening, Mr. Powell also did not push back on the market’s assessment that rates could be lower by mid-2024. Bottom line: Powell’s speech did not change the market’s view that the Fed will likely hold rates steady in September. Further, most of the market believes rates will be lower than they stand today by June 2024. Here, too, Powell’s Jackson Hole speech did little to change that view. That said, Mr. Powell’s comments last week did temper expectations for how much lower rates could be next year while driving home the Fed’s consistent message of a higher-for-longer rate environment. Yet, investors were broadly comfortable with that messaging, which helped stocks close Friday on a high note.          

Finally, on the review front, mortgage rates hit a 23-year high, purchase applications hit a 28-year low, and preliminary looks at August manufacturing and services activity showed levels weakened more than expected from July.

The week ahead 

With the calendar shifting to September later this week, investors will begin to contend with one of the S&P 500’s weakest months of the year. Over the last ten years, the S&P 500 has averaged a decline of 1.5% in September and has finished the month lower 60% of the time. According to Bespoke Investment Group, in the post-World War II era, the S&P 500 has averaged a September decline of 0.7% and finished higher just 44% of the time. However, in years where the S&P 500 was higher by over +10% year-to-date heading into September (like this year), the Index has averaged a September gain of +0.7%, finishing positive 56% of the time. Importantly, while seasonality factors tend to be weak in the September and early-October period, longer-term investors should look through the potential volatility. In our view, several crosscurrents are currently moving through the market. Earnings trends, inflation dynamics, interest rate policy, and evolving economic conditions are all signaling a mix of factors that, in our view, warrant a balanced portfolio approach heading into a seasonally weak period for stocks. Yet, if the S&P 500 were to move down to its 200-day moving average at some point over the coming weeks, such a decline would mark a roughly 10% drawdown from the July peak. We believe such a correction would actually be healthy and normal, especially given the Index rose for five consecutive months through July and is only down about 4.0% in August.    

Importantly, this week will bring several key economic releases that could help signal if growth and inflation is cooling enough to keep the Fed on pause next month or if the central bank may need to pump the brakes a little more by lifting its target rate. On Tuesday, August Consumer Confidence and the July Job Openings and Labor Turnover Survey (JOLTS) will provide updates on consumer attitudes about their financial situation and the overall number of available jobs in the U.S. economy. Both measures are expected to modestly soften from prior levels, which could be a market positive, as it would help add more evidence of a Fed pause in September.

July pending home sales, July PCE inflation, August ADP employment, August ISM manufacturing, and a second look at Q2 GDP will provide a heavy slate of economic data to help build the case for or against another Fed rate hike in September. But it will be Friday’s August nonfarm payrolls report that may carry the most influence on building that case. FactSet estimates call for nonfarm payrolls to grow by +175,000 in August, down from +187,000 in July. The unemployment rate is expected to hold steady at 3.5% or near the 54-year low of 3.43% hit in January. Bottom line: Investors want to see economic releases this week that suggest activity is slowing enough to keep further rate hikes at bay but not too slow to indicate the economy is headed for a recession. Considering the Q2 earnings season is in the rearview mirror, and the next Fed meeting is weeks away, incoming data on the economy will likely take center stage for a while.