Good morning investors. Unfortunately for vacation days and our portfolios, it’s the final week of summer.

Today’s edition unpacks why even welcome news from the Fed may not be enough to buoy markets in September.

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September showers inbound

Jerome Powell confirmed in Jackson Hole that “the time has come” to cut interest rates.

Just the same, history suggests a stock market sell-off is around the corner. 

For months now, a September rate cut has been table stakes for markets. Yet by the time the central bank delivers on those expectations, it’s possible stock prices will be lower than they are today. 

Downbeat historical data, seasonality, and election volatility could all conspire to drag indexes lower despite the Fed’s best intentions. 

Stocks finished Friday’s trading session in the green but the overall market reaction was relatively lukewarm. While the speech delivered “good news” for investors, it included nothing surprising. 

Notably, the Russell 2000, the interest-rate sensitive small-cap index, spiked more than 3% on the day. Similarly, homebuilder stocks also marched higher. 

As I wrote last week, September is the weakest month of the year on average dating back to 1948.

This four-week stretch typically sees a 0.7% decline, according to data from BMO Capital Markets. 

February, the second-worst month of the year, sees a milder 0.1% dip. 

This trend has worsened in recent years. The last four Septembers have seen market losses of about 3.9%, 4.8%, 9.3%, and 4.9%, as Interactive Brokers’ chief strategist Steve Sosnick pointed out in a Friday note.

“Chasing momentum is tempting, but potentially treacherous at this time of year,” Sosnick said, adding that he is “a bit cautious” in the short-term. 

And without drawing too much correlation, perhaps it’s not nothing that big-name investors like Warren Buffett and Michael Burry of “The Big Short” fame have been shrinking their stock portfolios over the last quarter.

Alternatively, it is possible that investors’ enthusiasm for rate cuts help them shrug off any long-standing trends or jitters around the election. 

As of Sunday evening, CME data suggests a three-in-four shot for a quarter-point move lower next month.

Those odds stayed about the same before and after Powell’s speech.

What Powell did not discuss in Jackson Hole, meanwhile, was how aggressively the Fed would ease policy.

Calls for jumbo-sized 50-basis-point cuts have fluctuated over recent weeks but most analysts expect a more gradual path lower.

Look for the August jobs report to help answer that question. 

“Our baseline is for successive cuts of 25 bps in each of September, November, and December,” said David Doyle, head of economics at Macquarie.

“Should the labor market and growth prove less resilient than we anticipate, more substantial policy easing would be likely.”

Comments or feedback? Hit reply to this email or let me know on X @philrosenn.

Elsewhere:

🗞️ The Middle East remains on edge. Israel says it stopped a planned Hezbollah attack as the country sent 100 warplanes over Southern Lebanon. The attack began early Sunday morning local time, Israeli officials said, based on intelligence that Hezbollah was about to fire missiles into northern Israel. The region remains braced for conflict that could involve Iran and its allies. (WSJ)

🌀 Hurricanes could rattle the Fed. Multiple severe storms are expected to make their way through parts of the US in a more active than usual season. Even one of those hurricanes could shake up the economic data that the central bank depends on to make policy choices. Employment and housing data, for instance, have already seen volatility tied to weather. (Barron’s)

✂️Traders are debating the size and pace of rate cuts. Powell has made it clear that a September cut is coming, and that’s led bond market investors to wager big on lower rates. Meanwhile, the weakening US dollar has been emerging as the new currency of choice for the so-called carry trade. (Bloomberg)

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