September is historically a volatile and down month for stocks. We’re seeing this seasonal trend play out.

Investors nervously await crucial inflation data scheduled for release later this week. In turn, the inflation numbers will shape the Federal Reserve’s crucial decision next week on interest rates.

Wall Street continues to get caught in a tug-of-war between inflation and economic growth. The balance between these two factors will drive the Fed’s decisions next week on monetary policy.

The big news ahead is Wednesday’s consumer price index (CPI) reading, followed by Thursday’s report on the producer price index (PPI). Brace yourself for market-moving data.

Rising energy prices are likely to manifest negatively in the inflation numbers, but the crux will be the “core” prices that exclude volatile energy and food components.

The energy sector has been on a tear lately, but energy stocks are probably poised to soon pullback and consolidate after their big run-up. OPEC+ has been curtailing production to keep supplies tight, but at some point, we’ll start to see push-back from consumers as the per-barrel price of crude oil heads toward $100. Saudi Arabia and Russia may soon find it prudent to loosen the spigot, rather than clobber the global economy.

Inflation is cooling, a trend that’s likely to be confirmed by the government’s CPI and PPI reports this week (both for August), but investors shouldn’t expect disinflation to move in linear fashion.

Retail sales figures this week will provide insights into how consumers concluded their summer spending, which will presage the hugely important holiday shopping season.

U.S. stocks finished last week in negative territory and closed Monday in the green.

On Tuesday, the main U.S. stock market indices closed mostly lower as follows:

• DJIA: -0.05%
• S&P 500: -0.57%
• NASDAQ: -1.04%
• Russell 2000: +0.01%

Crude oil prices jumped nearly 2%, stoking inflation fears. The CBOE Volatility Index (VIX), aka “fear index,” spiked by more than 3%.

Energy stocks led gainers; technology stocks were the laggards. Oracle’s (NYSE: ORCL) first-quarter 2024 earnings report missed expectations and revealed slowing cloud sales growth. ORCL shares tumbled 13.50%.

Apple’s (NSDQ: AAPL) annual product showcase Tuesday failed to impress Wall Street; AAPL shares fell 1.71%. Investors also worry about China’s prohibition of government workers at state-owned enterprises from using iPhones.

Apparently, artificial intelligence is not a panacea for the tech sector.

WATCH THIS VIDEO: Momentum Hits a Rough Patch

Recent economic data share one commonality: decelerating but still intact growth. That’s the sort of balance that the Fed wants to see.

The next meeting of the policy-making Federal Open Market Committee (FOMC), scheduled for September 19-20, will be a make-or-break event for stocks. Investors are understandably jittery.

The betting is that the Fed will stand pat. According to CME Group’s FedWatch tool, the probability of the Fed hitting the “pause” button on rates currently stands at 93% (see chart).

Source: CME Group’s FedWatch

If the Fed refrains from hiking rates again, current headwinds could give way to fresh tailwinds that carry into 2024. Once we’ve reached the peak in the fed funds rate, historically the next 12 months are positive for both the equity and bond markets.

S&P 500 corporate earnings growth is expected to turn positive in the third and fourth quarters of 2023 (as well as for calendar year 2023), and U.S. economic growth continues to get revised upwards but still isn’t hot enough to ignite inflation.

The Fed’s latest Beige Book, released September 6, described overall business activity in the U.S. this way:

“Contacts from most Districts indicated economic growth was modest during July and August. Consumer spending on tourism was stronger than expected, surging during what most contacts considered the last stage of pent-up demand for leisure travel from the pandemic era. But other retail spending continued to slow, especially on non-essential items.”

Most analysts (including the Fed) no longer expect a recession, although the coast isn’t clear just yet. We still need to see the full deleterious effects of higher rates. When rates rise, their pressure on the economy tends to be lagging.

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John Persinos is the editorial director of Investing Daily.

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