Rate Cut? Good, But Too Fast: Fear of Recession
September is historically a tough month for stocks, and the first day of trading in the United States was no exception.
The S&P 500 is facing its fourth consecutive September decline. The last time such a streak of declines occurred was between 1999 and 2003, when the index marked five consecutive years of September losses. While precedent is no guarantee of the future, it is reasonable to expect that this month could be particularly volatile. Some negative manufacturing data revived concerns about the strength of the economic expansion that had been present since August, prompting a flight to defensive sectors.
In both Europe and the United States, markets closed lower, closing at the day’s lows and recording their worst session since August 5. At Piazza Affari, the index closed with a decline of 1.33%, resulting in the worst among the main European markets, weighed down by widespread selling. In particular, Saipem and Iveco suffered significant losses, respectively -7.07% and -4.93%. Only 8 stocks out of 40 closed higher, with Brunello Cucinelli standing out thanks to a +2.84%. Purchases were concentrated in traditionally defensive sectors, such as utilities (Terna, Snam, Italgas and Enel) and the healthcare sector (DiaSorin, Amplifon and Recordati).
Across the ocean, too, it was a classic “risk-off” day, with cyclical sectors suffering greatly, particularly technology, growth and momentum. Stocks had their worst day since the August 5 crash, with the S&P 500 index falling more than 2%. Concerns about growth and monetary policy helped trigger the selling of risky assets, replicating the behavior seen the previous month.
As in August, The technology sector was among the hardest hit, with Nvidia leading the slide among semiconductor makers. The parallel with August does not stop there. The yen has jumped, oil has suffered a sharp decline, as has copper.
Wall Street’s fear gauge, the VIX, jumped 38%, breaking the 20-point threshold. Treasury yields also fell, with traders returning to bets on a possible 50-basis-point Fed rate cut in September. The probability of a 25-point cut has fallen from 70% on August 30 to 59%.
However, Unlike the August 5 session, not all sectors of the S&P 500 closed in the red. Basic consumption and real estate showed positive trends, with the former reaching new all-time highs.
With inflation expectations anchored, attention has shifted to the health of the economy, as signs of weakness could accelerate policy easing. While rate cuts tend to bode well for stocks, that’s usually not the case when the Fed rushes to prevent a recession. Investors now expect the central bank to cut rates by as much as two percentage points over the next 12 months, a sharp decline that underscores recession fears.
One of the data that fueled these concerns was the US ISM manufacturing PMI for August which, although up, came in lower than expected (47.2 versus the 47.5 expected). But it was the details that made the difference: the balance between orders and inventories entered negative territory, a less than encouraging early sign for manufacturing production. Recent contractions seen in China and Europe have now spread to the United States, reinforcing fears of a global slowdown.
An important signal also came from oil, with the price of Crude Oil and Brent losing more than 4% yesterday, falling below $70 per barrel for WTI, returning to the levels of June 2023, when Saudi Arabia announced its voluntary production cut. Oil markets have long been conditioned by the weakness of Chinese demand, so much so that many investors seem to ignore not only geopolitical risks, but also signs of tension in fundamentals, such as the continued reduction in global inventories. Developments in Libya, which led to a 600,000 barrel-per-day production collapse, were also largely ignored by the market and quickly scrutinized for a possible resurgence.
Finally, another negative note comes from the semiconductor sector. The VanEck Semiconductor ETF recorded a decline of 7.5%, the sharpest since March 2020. Nvidia plunged 9.5%, wiping out about $279 billion in value in a single day (more than the entire market capitalization of Chevron, the only energy stock in the Dow Jones). The U.S. Department of Justice has issued subpoenas to Nvidia and other companies as part of an investigation into possible antitrust violations.
Although September is not the most favorable month, it is important not to always look at the glass half empty. Possible corrections could strengthen the opportunities to buy on dips. Reasons to remain optimistic include earnings growth and the possibility that the Fed may begin to ease monetary policy, supported by inflation now under control and a recession avoided.
*Italian Market Analyst at eToro
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