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If the Federal Reserve moves to cut interest rates next week, would market seasonality be impacted?
September has historically been the worst month for S&P 500 returns, while October has been the best. But could the pattern be disrupted if the Federal Open Market Committee votes to cut rates during their meeting next Wednesday?
We asked Seeking Alpha analysts Victor Dergunov of The Financial Prophet, Chris Lau of DIY Value Investing and Jacob Hess of MTS Insights for their thoughts on the topic.
Victor Dergunov: I think the upcoming rate cut has already influenced the market’s seasonality. The forthcoming September rate cut is a bullish event for stocks, but the stock market was already overextended technically in July. Therefore, the market needed a pullback, and we had a textbook 10% correction in July/August. Due to the recent correction, September could be a solid month for stocks, followed by a strong rally in the year’s final months.
Chris Lau: The Fed’s first rate cut should have no direct correlation to market seasonality. The cut formally shifts monetary policy from a neutral stance to a more accommodative one. Since the markets have already priced in this cut, they are more likely to stage short-lived rallies or head lower in the next two months and up until the U.S. election. The market is less likely to form a sustained uptrend.
Investors should therefore assess Fed policy, seasonality and the election. Under those uncertain conditions, bonds and banks are the most attractive holdings. The 20+ Year Treasury Bond ETF (NASDAQ:TLT), along with banks like J.P. Morgan (JPM) and Bank of America (BAC) should perform well.
Jacob Hess of MTS Insights: The Fed’s rate cut in September likely won’t impact the seasonality of the S&P 500. The initial uncertainty around the easing and dovish posturing of the FOMC will probably cause some uncertainty in the markets, which would keep September a red month (SPY is down around -3% through September 9th).
However, stocks tend to do well when the Fed eases into an expansion. As long as macro data reflects a gradual easing in the labor market and continued economic growth, the S&P 500 has a good chance of being green in October.
