Updated Sept 30, 2024, 2:12 am EDT / Original Sept 27, 2024, 1:01 pm EDT
The Nasdaq MarketSite in New York. (Yuki Iwamura/Bloomberg)
What swoon?
The bears usually come out in full force in September, historically the worst month for stocks. And while the market got off to a rough start in the Labor Day–shortened first week, it’s been all rainbows and sunshine since then. The Federal Reserve’s jumbo-sized rate cut —with the promise of more easing to come—reignited hopes for a soft landing for the U.S. economy, while inflation pressures continue to recede. The Dow Jones Industrial Average
DJIA+0.33% and the S&P 500 indexSPX-0.13% are at record highs, while the Nasdaq CompositeCOMP-0.39% isn’t far from one. New stimulus from China has added to the excitement, helping to lead to a rebound for many top Chinese tech stocks. The bulls have taken charge once again.
- China and the Fed Didn’t Reshuffled Things at All. That’s Good.
- ‘Sell in May’ Was a Costly Mistake. Should You Buy Now at Record Highs?
- Jobs Data; Powell Speaks; Nike, Carnival Earnings, More to Watch This Week.
But October, another notoriously volatile month, looms—and with it a crucial week for investors and the Fed. A slew of jobs numbers, including the Job Openings and Labor Turnover Survey (Jolts), ADP’s report on private-sector jobs growth, weekly jobless claims, and the September nonfarm payrolls jobs report are all due out, as are the latest Institute for Supply Management manufacturing and services surveys.Market SnapshotSource: FactSetIndustrial Select Sector SPDR ETFNASDAQ Composite IndexDow Jones Industrial AverageS&P 500 IndexSept. 23Sept. 24Sept. 25Sept. 26Sept. 27-0.50-0.2500.250.500.751.001.251.501.752.00%
The payrolls report is most likely to move markets. Economists forecast a slight increase in job gains for September, to 145,000, compared with 142,000 in August. Investors are hoping to see slightly cooler numbers, which would justify further rate cuts from the Fed. If the numbers disappoint too much, alarm bells could start to sound about a rapidly weakening economy, putting a damper on Wall Street’s currently chipper mood.
“We don’t expect a recession in the next 12 months. But the problem is now that’s the consensus view,” says Sébastien Page, chief investment officer at T. Rowe Price. “The market is pricing in a soft landing…if not something better.”
Is it ever. The S&P 500 is now trading at 21 times earnings estimates for 2025, above its five-year average forward price/earnings ratio of 19 and inching closer to its high of 23. With that in mind, Page told Barron’s that investors need to be selective about what and when they buy, particularly heading into an increasingly uncertain presidential election. He also thinks the recent broadening out of the rally will continue as earnings growth improves for more cyclical companies outside of tech and the Magnificent Seven. He likes the industrial, healthcare, and energy sectors.
READ MORE
Jeff Weniger, head of equity strategy at ETF provider WisdomTree, is bullish on more rate-sensitive and value-oriented sectors as well. He argues that big dividend payers, such as real estate companies, utilities, and financials, are better bets than tech and other growth stocks. Weniger says the speed and magnitude of rate cuts is “the No. 1 driver for the market right now.” If short-term rates continue to come down rapidly, that will make income-producing stocks, as well as bonds, more attractive.
Advertisement – Scroll to Continue
Great expectations on Wall Street may prove to be the biggest hurdle investors must overcome. Traders are now pricing in nearly 50-50 odds of another half-point rate cut at the Fed’s Nov. 7 meeting. Page notes that it would be “unusual for the Fed to cut so aggressively outside of an imminent or present recession,” while Weniger says that he sees “no crisis in the immediate future.”
So investors need to tread carefully. The biggest risk to the rally could be that the market is pricing in larger rate cuts than are needed. The perfect recipe for further gains in earnings—and stock prices—is probably a series of quarter-point cuts. That would show the market that the Fed is still confident that the economy isn’t losing momentum too rapidly.
That would be less like a swoon, and more like floating on air.
Read More Trader
- The Good Times May Be Over for GM Stock
- Nike Stock Is a Bargain Ahead of Earnings. Don’t Wait for More Shoes to Drop.
Write to Paul R. La Monica at paul.lamonica@barrons.com