Stock Traders Face Off Against Hawkish Fed at Worst Time of Year

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After a week to forget on Wall Street, the road becomes even harder for battle-weary investors as the world’s main central bank holds another hawkish political gathering in the middle of what has been its worst month on record for US stock returns.

Hedged-to-the-tooth equity managers are raising all sorts of warning signs for potential dip buyers – from typical bearish trading patterns in September to medium-term election risk to concerns about corporate America’s earnings performance. And another likely outsized rate hike by the Federal Reserve on Wednesday after a higher-than-expected inflation rate in August last week, Wall Street has seen little reason for a sustained recovery anytime soon.

Now even the calendar is against anyone who wants to buy shares. This is the weakest month for the S&P 500 Index in data dating back to the 1950s, and it’s already down more than 2%.

“Clients and the markets are very nervous,” said Victoria Greene, founding partner at G Squared Private Wealth, who says the US benchmark could fall as low as 3,400, down 12% from current levels. “It’s too early for us to be dip buyers.”

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Many investors who thought inflation had peaked got a rude awakening from Tuesday’s searing CPI report. It hit stocks, sending the S&P 500 into its worst week since its June low.

Traders are now bracing for another 75 basis point hike with some predicting a 100 basis point rise. The benchmark gauge, which by mid-August was up as much as 17% from its June low, is up just 5.6% over the past three months.

Read more: Fed likely to rise to 4% in 2022 and signals higher for longer

weakest weeks

“The CPI report is a turning point,” said Mark Newton, technical strategist at Fundstrat Global Advisors, turning a long-term bull into a short-term bear. Newton sees the S&P 500 bottoming out in mid-October.

Historically, the back half of September is one of the most difficult times for the stock market. According to Stock Trader’s Almanac, the S&P 500 has declined an average of 0.75% during the second half of the month since 1950.

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There are a few theories about this. Investors returning from summer vacation tend to reconsider portfolio positioning defensively. Companies are preparing their budgets for the coming year and debating tightening their belts. And mutual funds often window-dress by selling losing positions to reduce the size of their capital gains distributions.

Of course, anyone trying to guess seasonal trading belief patterns does so knowing that the past is not a prologue and September has produced positive returns for the past few years. Still, this is another bad omen for a market with few good ones to attract dip buyers.

And there’s little rest as October is the most volatile month in stock markets. Since World War II, average volatility in October is 36% higher than the average for the other 11 months of the year, according to investment research firm CFRA. One reason is that markets tend to struggle leading up to midterm elections and this is a midterm year. But stocks typically post a strong rally after the midterms into year-end.

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bear killer

Stocks will be boosted by third-quarter earnings this October after the Fed meeting. Earnings so far have been better than feared, but strategists at Morgan Stanley and Bank of America Corp. warn that estimates will need to be cut much further before stocks can reach a true bottom.

Read: BofA sees new lows for US stocks as inflation shock ‘not over yet’

“The Fed needs to see inflation fall and is getting closer to its 2% target, but we’re a long way from that,” said Stephanie Lang, chief investment officer at Homrich Berg, which recommends being defensively positioned in favor of consumer staples and healthcare companies .

But while October is known as a spooky month for stocks, it’s also known as “Bear Killer” — according to the Stock Trader’s Almanac, it turned the tide in about a dozen post-World War II market falls.

If history is any guide, traders can be forgiven for hoping for the market bottom this month.

“When investors are very fearful, bear markets tend to die,” Fundstrat’s Newton said.

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