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The September Effect

Market Update

09.09.2024

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What happened last week?

US

  • Nvidia led global tech stocks sharply lower, with the AI chipmaker losing $279 billion in market value.
  • The US job market looked a bit livelier in August, with a stronger run of new hires and a slightly lower unemployment rate.

Europe

  • Volkswagen drafted plans to shutter German factories for the first time in 87 years.

    Why It Matters

    Nvidia returned from the Labor Day weekend in a foul mood. The chipmaker plunged almost 10% on Tuesday, leading its semiconductor pals lower, after some dreary US economic data. It continued its slide after-hours, on news that US regulators were investigating the AI darling for potential antitrust violations. The data and the regulatory probe made for a one-two punch investors didn’t enjoy in the least: the volatility index – “the fear gauge”, as it’s more commonly known – rose 36%.

    German automaker Volkswagen said it’s contemplating shuttering factories in its home country for the first time in its 87-year history, as it struggles to compete in the post-pandemic market. Car sales in Europe are still nearly one-fifth below pre-2020 levels, and competition and trade restrictions in China are making exports more challenging. 

    And it’s not the only European brand that’s struggling to get out of a low gear: the bloc’s biggest carmakers are struggling to compete with Tesla and Chinese rivals.

    The US economy added a reassuring 142,000 new jobs in August – just a bit lower than the 161,000 that were expected, the Department of Labor said Friday. The unemployment rate, meanwhile, improved slightly, dropping to 4.2%, from 4.3% the month before. And that likely had some investors breathing a sigh of relief: they’ve been worried about a dramatic worsening in the health of the US economy. The jobs report comes at a crucial time for the Federal Reserve: it’s the last major data release due before its mid-September interest rate decision. The central bank is expected to cut its key lending rate by at least 0.25 percentage points.

    This week’s focus: The September Effect

    September is historically far and away the worst month for stocks. Since 1928, the S&P 500 has had an average decline of 1.2% during the month, while it’s had average gains in each of the other eleven. And the so-called September effect seems to have become more exaggerated over time: in the past decade, the month’s average slide has been 2.3%. What’s more, in the past four years, the slip has been no smaller than 3.9% and as big as 9.3%.

    And it’s strange that this occurs at all. Weird little trends like this don’t usually hang on anymore: machine-run “quant” funds these days are designed to detect (and profit from) even the tiniest anomalies in the market. And the trades they implement typically spell the end of whatever oddity they discover. So it’s hard to imagine that a doozy like this could escape their notice. Still, it happens.

    So the September effect is on folks’ minds now. And it’s compounding their other fears – that AI may be a bubble, that the US may be steering toward a recession, that rising geopolitical tensions could hamper global trade, or that some unforeseen risk might come along and cause companies’ earnings to crumble. Makes sense then that the volatility index – the market’s so-called fear gauge – shot well higher again last week, rising 36%. To put it simply, investors are on edge.

    The good news is there are only three more weeks in September. Then investors can turn their superstitious minds to another, happier quirk of the calendar: in US presidential election years, November and December tend to be good months, at least since the early 1990s – with average gains of 3%.

    The Week Ahead

    On The Calendar

    • Monday: China inflation (August). Earnings: Oracle.
    • Tuesday: Earnings: Gamestop.
    • Wednesday: UK GDP (July), UK industrial production (July), US inflation (August).
    • Thursday: Japan producer prices (August). Earnings: Adobe.
    • Friday: EU industrial production (July), US consumer sentiment (September).

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