Will This Market Work After Labor Day?

DEWITT, Mich. - Sept. 7, 2021 - PRLog -- Fashion rules say you shouldn't wear white after labor day. The market, on the other hand, may wear a little redder as we advance this year, with renewed pandemic headwinds and shifting Fed policy adding new wrinkles to the outlook. We expect, however, that a jump in volatility and any accompanying weakness in the market will prove temporary, with the fundamental outlook supporting the case for equities to remain in fashion.

September swing?

• On average, over the last 20 years, September has been the worst-performing month for the S&P 500¹. We'd note, however, that this is more a function of magnitude than frequency, with September posting a monthly decline slightly less than half the time but experiencing a decline of more than 7% four times¹.
• The broader direction of the market is not governed by the calendar, but there has been a tendency for volatility to pick up as the summer winds down. September ranks No. 2 and October No. 1 in largest average monthly moves, with 35% of years in the last two decades experiencing a move (up or down) of more than 6% during one or both months¹.
• With the economic and earnings expansions far from exhausted, we don't think conditions are ripe for a dramatic sell-off, but the coming shift in monetary-policy stimulus could be a spark for increased market fluctuations this fall.

Post-Summer Cooldown

• The economy has been running hot for much of this year, but recent data are signaling that a patch of more tepid growth may be on the way. The rate of U.S. GDP growth has peaked, and the impacts of the delta variant have spurred concerns of a fading recovery. We view this as a midcycle slowdown 1) that is inevitable given the impact of stimulus checks and the initial effects of reopening the economy, and 2) that will prove temporary, with above-trend GDP growth persisting next year.
• The August employment report released on Friday was consistent with a recovery enduring some growing pains. Monthly job gains totaled 235,000, well below expectations and a drop of 800,000 from July. Job growth in the leisure and hospitality sector stalled, highlighting the impact of renewed pandemic restrictions.
• We'd characterize this as a soft patch, not a sustained new direction for the labor market. Coupled with the downturn in recent consumer-confidence readings, this does signal potential weakness in consumer spending for the third quarter. Nevertheless, we think a gradually improving labor market will be the backbone of an economic expansion that has plenty of life left.

Source: 1. Bloomberg