In September, the Nasdaq gained 2.68%, the Dow Jones advanced 1.85%, the S&P 500 performed with an increase of 2.02%, and the TSX gained 2.80% for the month.
September historically has been the worst month of the year for the stock market, and it seemed like many were anticipating a material decline in the month. As is often the case, the opposite occurred from what consensus was expecting. September defied the odds and expectations with good performance for the indexes.
In September there was a half-percentage interest rate cut by the central bank in the U.S. and a quarter-point reduction in Canada. Both the central banks in the U.S. and Canada signaled that further rate cuts may be coming in 2024; of course, those decisions are data dependent. The prime interest rates for the U.S. and Canada are outlined below.
In the U.S., The Fed sets monetary policy to meet its dual mandates for price stability and full employment. The Fed’s mandate is outlined as: “keep unemployment as low as possible while keeping consumer inflation at or near two percent.” Policymakers cut interest rates when the balance of risks tilts toward inflation falling too low, below the Fed’s 2% inflation target or unemployment rising too high. In Canada, the central bank mandate is “to promote the economic and financial welfare of Canada.” Part of that mandate is to keep inflation low, stable and predictable as one of its four core functions.
When the Fed is cutting rates, or even has a bias toward rate cuts, the “Fed Put” is said to be in force. A put option gives investors downside protection if a stock falls below a certain price. When Wall Street says there’s a “Fed Put,” the implication is that Powell & Co. will ride to the rescue if the S&P 500 sells off, because a falling stock market could hinder the Fed from achieving its mandates.
Interest rate-sensitive sectors such as real estate, financials, utilities, and resource companies are benefiting from the rate reductions, and are reflected in the stock prices of many companies in these sectors that have been lagging for some time.
History shows that the S&P 500 usually fares well after the Fed starts to lower interest rates. Over the prior nine rate-cutting cycles, the S&P 500 has gained nearly 10% on average in the six months following the first cut. The major exceptions came after the Fed began cutting in 2001 and 2007, because Fed easing didn’t prove sufficient to avert recession and a hit to S&P 500 earnings.
Over the last 75 years, the S&P 500 has fallen in the final three months of the year only eight times when momentum was strong during the first three quarters. Whenever returns exceed 16.4% in the first nine months (the S&P is up 20% this year), the S&P has climbed in the fourth quarter 80% of the time. Fourth-quarter gains, however, lag with a 3.5% average return.
Moreover, when the S&P 500 makes a new high during September, the benchmark index climbs in the fourth quarter 91.3% of the time. The average S&P 500 return in October through December is 4.8%. And in 21 out of 23 years, has produced positive results.
The Dow, S&P 500 and NYSE are all sitting at new all-time highs. Breadth, while not robust on the Nasdaq, is better on the NYSE, with 75% of all issues currently above their 50-day moving average and 74% above their respective 200-day moving average. The advance-decline line (A/D Line) is at new all-time highs, and it generally tops months ahead of the index.
The bullish sentiment readings are currently not at excessive levels, which is a positive sign. Overall, the various indicators of market direction are somewhat contradictory, but the bull market at this point is still intact. October is the second worst month of the year and a pullback in October would not be unexpected as a setup for new highs.
As we pointed out above, lower interest rates are expected and generally does provide a tailwind for the market with some exceptions as pointed out above. These recent periods that the market fell were partly due to the dot.com bust in 2000 and the financial crises in 2008.
We continue to be constructive on the markets with the presidential election soon to be over, interest rates falling, and no recession likely in 2025. We expect new highs as we approach the end of 2024 and the beginning of 2025.
