Seasonality Shifts From Headwind to Tailwind For Markets

The financial markets closed the week on a positive note, buoyed by a stronger-than-expected jobs report. The U.S. economy gained 336,000 jobs, significantly higher than the 170,000 jobs that economists expected.

Originally, stocks declined in response to the report due to concerns that the Federal Reserve would be more likely to raise the short-term interest rate they control as they attempt to cool the economy. However, as the morning progressed, investors focused on the slower growth in workers’ average hourly earnings. Fed Chair Jerome Powell has said that wage growth must decelerate for inflation to return to the Fed’s 2% target.

SEASONALITY

This year, August and September lived up to their reputation as more challenging months for the financial markets. At one point in September, the S&P 500 had declined by 7.01% from its high on July 31st. However, such a decline is not uncommon. In fact, over the last five years, the S&P 500 has averaged a drawdown of 8.72% during the August-September timeframe.

But here’s the good news: from October 1st to December 31st, stocks tend to bounce back, showing an average gain of 9.29% dating back to 2019. Of course, this does not guarantee anything for 2023, but it does indicate that seasonality has shifted from being a headwind in these last two months to a tailwind from now until the end of the year.

INTEREST RATES

The biggest story of the last two months has been the rise in long-term interest rates. The yield on a 10-year Treasury bond has increased from 3.97% on July 31st to 4.78% today. Higher interest rates mean higher payments for new borrowers. Of note, the interest rate on a 30-year mortgage reached 7.81% on Friday, marking the highest rate since 2007.

The surge in interest rates was triggered by the Treasury Department’s announcement on July 31st that they would be issuing over $1 trillion in bonds for the third quarter. This was an increase of $274 billion from their previous estimate in May. This significant boost in supply prompted investors to require higher rates.

Going back to how we began this article, with the strong jobs report, the economy has continued to show resilience. This should translate into a positive outlook for company earnings when third-quarter reports begin in two weeks. That is exactly what happened in July when upbeat second-quarter earnings reports propelled stocks higher. We will hope for a repeat this month, especially considering the support of seasonality. Have a great weekend.