Welcome to my latest video presentation. Below is a condensed transcript; the video contains additional details and several charts.

The dog days of August are upon us. Summer is starting to fade. As a 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.

Indeed, September 2021 was the S&P 500’s worst month since the nadir of the pandemic-induced market crash in March 2020.

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.

Read This Story: Navigating a Choppy Market

Complicating the picture is the Federal Reserve’s scheduled meeting in September to announce its next interest rate hike. Rather than another 0.75% boost, or a hyper-aggressive 1.00%, the markets are currently pricing in a hike of 0.50%. But those expectations could quickly change, depending on the next inflation reading, which is due this Friday.

U.S. and international stocks closed lower last week, as recurring worries recaptured center stage (see table).

The mood on Wall Street has been volatile, but at least consumers seem to be getting more confident, and that’s a good sign for equity markets.

The University of Michigan’s Consumer Confidence Index fell to a record low of 50.0 in June, but the index seems to have bottomed. The index in early August rose to 55.1, up from 51.5 in July. This reading beat the market expectation of 52.5.

A bottoming out and then rebound in consumer sentiment typically paves the way for positive stock market performance.

In the three prior occurrences when the sentiment index dipped below 60 (1980, 2008, and 2011) and then started to recover, the stock market was higher in each of the following six- and 12-month periods, with the S&P 500 averaging an increase of 16.0% over the next six months and 20.9% over the following 12 months.

China hits the skids…

New data published last week by China’s National Bureau of Statistics showed that China’s economic slump accelerated in July, mostly due to a real estate crisis and strict COVID lockdowns.

The real estate situation in the world’s second-largest economy is particularly grim. From January to July, national real estate development investment in China was 7.9 billion yuan, a year-over-year decrease of 6.4%. The subindex of residential investment was 6 billion yuan, a decline of 5.8%.

China’s status as the world’s manufacturing hub is why the economic consequences of the resurgent pandemic in that country continues to exert ripple effects around the world.

Many of the world’s largest consumer brands are heavily reliant on Chinese manufacturing and are still trying to cope with supply constraints. China’s woes appear likely to persist into the autumn.

The week ahead…

In the coming days, the economic docket is crowded with crucial economic data. Keep an eye on these reports in particular: Manufacturing and services PMI and new home sales (Tuesday); durable goods orders and pending home sales (Wednesday); initial jobless claims and gross domestic product (Thursday); Personal Consumption Expenditures (PCE), and consumer spending and sentiment (Friday).

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 next PCE (for July) is expected to offer signs that inflation has peaked. Cooling inflation gives the Fed more wriggle room to turn dovish, but don’t expect the central bank to abandon tightening altogether. And if the PCE this week comes in hotter than expected, well, all bets are off.

A man for all seasons…

Worried about the market uncertainty I’ve just described? You don’t have to sit on the sidelines. You can ride out any turbulence in the coming weeks and still stay in the game.

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John Persinos is the editorial director of Investing Daily.

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