Labor Day, the traditional end to summer, looms on the calendar. As a native New Englander, I consider the fall, with its turning of the leaves, to be the most beautiful season. But autumn usually isn’t kind to the stock market.

September-October is historically the worst-performing period of the year for the stock market. September is the only month that shows a decline, on average, over the past 100 years.

To be sure, the market this year is approaching autumn in much better shape that last year. Inflation is dramatically falling, economic growth is resilient (but not too hot), and corporate earnings are surprisingly strong. The main U.S. stock market indices are firmly in positive territory year-to-date.

Despite Federal Reserve Chair Jerome Powell’s insistence on talking tough about monetary policy, the Fed’s actual policy is evolving to become more favorable for stocks and bonds. However, volatility in the stock market tends to increase in September and October, with downward momentum.

Will history repeat itself? Let’s look at the investment backdrop for the final days of summer and into the fall.

The autumn chill…

Consider the so-called September effect. One plausible explanation for this dynamic is that traders return from their summer holidays to see that many of the problems they thought had been only small, temporary clouds on the horizon are now persistent and will dominate the remainder of the year.

There’s also the October effect. Wall Street harbors the perception that stock markets tend to crash during October because that’s been the month of notable financial disasters (e.g., in 1929, 1987, and 2008). A full-fledged crash during October is a statistical anomaly, but the psychological effect tends to weigh on stocks.

From September-October, there’s clearly a seasonal behavioral bias as investors calibrate their portfolios with the end of summer to take profits. Another factor is that most mutual funds cash in their holdings to harvest tax losses.

Complicating the picture is the Fed’s meeting scheduled for September 19-20 to announce its next interest rate move. Wall Street is currently betting on a rate pause, under the assumption that July was “peak Fed.”

Odds have dropped to 11% that we’ll see a quarter point hike by the Fed, according to CME FedWatch (see chart).

However, those expectations could quickly change, depending on the next inflation reading, which is due this Thursday.

WATCH THIS VIDEO: The “FUD” Factor: Overcoming Fear, Uncertainty and Doubt

The sizzling summer rally has cooled in recent days. A major catalyst for the pullback in equities was Powell’s speech last week at Jackson Hole, Wyoming. Powell was more hawkish than Wall Street wanted, but he mostly played it down the middle. The stock market didn’t implode in response, as it did after Powell’s Jackson Hole speech last year, when he foretold “pain” for American households.

It’s easy to talk about pain when it’s not your own, of course. When listening to the uber-hawks who insist that we need to be brutal in the fight against inflation, I’m reminded of this remark made by President Harry Truman: “It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.”

The Conference Board reported Tuesday that its Consumer Confidence Index dipped from a downwardly revised 114.0 in July to 106.1 in August. This influential index gauges consumer sentiment about current and future economic conditions in the U.S.

The Present Situation subindex, which measures consumer sentiment about current business and labor market conditions, declined from 153.0 in July to 144.8 in August. The Expectations subindex, which gauges the short-term outlook for business and labor market conditions, as well as income expectations, fell from 88.0 in July to 80.2 this month.

Also on Tuesday, the U.S. Bureau of Labor Statistics (BLS) reported that the number of job vacancies fell to 8.8 million in July, the lowest level since March 2021, when the post-COVID rebound was starting to gain traction. BLS also downwardly revised June’s job openings total from 9.6 million to 9.2 million.

The upshot: The labor market is incrementally cooling, not rapidly decelerating. That’s the sort of Goldilocks situation preferred by Wall Street. The economy is growing, but not to the extent that it would trigger an aggressively hawkish response from the central bank.

As Mr. Powell, the “Oracle of Jackson Hole,” put it last week in his speech: “So far, job openings have declined substantially without increasing unemployment, a highly welcome but historically unusual result that appears to reflect large excess demand for labor.”

We’ll know more this Thursday, when new reports arrive on initial jobless claims, personal income, and the personal consumption expenditures (PCE) index.

Wall Street apparently expects good news. The main U.S. stock market benchmarks closed sharply higher Tuesday as follows:

• DJIA: +0.85%
• S&P 500: +1.45%
• NASDAQ: +1.74%
• Russell 2000: +1.42%

PCE bears the closest scrutiny. The PCE contains broader data than the more popularly known consumer price index and serves as the central bank’s favored inflation measure. The PCE is the “North Star” by which the Fed gauges inflation. The PCE this time around is expected to show a further cooling of inflation, but if the reading disappoints…watch out.

Editor’s Note: If you’re spooked by the uncertainty I’ve just described, consider the advice of my colleague Robert Rapier.

Robert Rapier is chief investment strategist of a trio of Investing Daily advisories: Utility Forecaster, Rapier’s Income Accelerator, and Income Forecaster.

Robert’s forte is finding investments that offer both growth and income, with reduced risk. Robert just found a rare type of investment that has raised its payouts by double-digits every year for the past 16 years. If you’re tired of anemic payouts, Robert has the remedy. Click here for details.

John Persinos is the editorial director of Investing Daily.

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