Thierry Hasse: Jittery investors face a long 10 days waiting on the Fed

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U.S. equity investors can be thankful that last week was an abbreviated trading week as the stock markets were simply ugly across the board.

The U.S. stock market closed out a negative week as economic worries are growing. The S&P 500 Index, a measure of broad market performance, declined 4.3% last week. It was the S&P 500’s worst showing since March 2023, during the regional bank crisis. The technology-laden Nasdaq registered a 5.8% decline, posting its worst week since 2022. (Source: CNBC.)

September is traditionally a difficult time for the stock markets. The beginning of the month started on the back foot as the latest August jobs data renewed concern of a slowing labor market that could lead to a U.S. economic recession. American companies added 142,000 nonfarm jobs to the payroll in August versus the 161,000 that the market was expecting. (Source U.S. Bureau of Labor Statistics.) While those figures are subject to numerous revisions, the recent pace of job creation over the last three months is markedly lower than at the beginning of the year.

Positive signs for fixed income

Fixed income markets, on the other hand, reacted positively to the additional signs of the labor market slowdown. Treasury yields declined across the curve, with the 10-year note yield closing the week at 3.71%, a 52-week low. The shape of the yield curve was of particular interest for fixed income investors as it finally “disinverted,” with the 2-year note finishing the week at 3.62%, 9 basis points lower than the yield on 10-year maturity debt.

The financial markets are now predicting a greater likelihood that the Federal Reserve will reduce interest rates by 50 basis points, rather than 25 basis points, at the Federal Open Markets Committee meeting on September 17-18.

Nowhere to hide

There was nowhere to hide in the risk markets this week. Technology stocks, value stocks, and small cap stocks all fell to various degrees. But there is solace in the ability of fixed income assets to provide significant hedge against the decline in equity positions in investors’ portfolios. Only four trading days ago the S&P 500 was trading within a whisker of its all time high. After a short trading week the narrative has completely turned and market participants are only talking about weakening investor sentiment, stretched equity valuations and the meltdown in the semiconductor sector.

Will Fed provide clarity?

This week, we will be looking for a catalyst for the stock markets to regain their footing over the near term. Paradoxically we feel that if the Federal Reserve eases monetary policy by only 25 basis points, markets might take this as an indication that the “economic soft landing” is alive and well, whereas a 50 basis point reduction would be interpreted by some as a sign of significant economic deterioration, with negative repercussions for the stock market. It will be a long 10 days until we receive clarity on monetary policy at the Fed meeting.

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