A Hawkish Fed, a United Auto Workers Strike, and Concerns Over a Government Shutdown

September 22, 2023

The market sold off yesterday, but we continue to see limited technical deterioration and are continuing to view this August-September pullback as primarily seasonal. Of course, there are always reasons for the pullback:

  1. Hawkish commentary from the Fed at its meeting this week: the FOMC removed 2 anticipated interest rate cuts from its "dot plot" through next year. However, Chairman Jerome Powell said the committee would remain "data dependent." So, the removal of those cuts may or may not actually occur.
  2. Concerns the Fed will overdo its tightening cycle and throw the economy into recession.
  3. A prolonged US auto worker strike.
  4. Concerns over a US Government shutdown.

On the latter point, notice our analysis of previous US government shutdowns (table below). Historically, they have proven to be buying opportunities 6 and 12 months later. Note particularly, 6 months out, the S&P 500 has been up 100% of the time by an average of 14.98%!

Sep_23_Shutdown Analog

*Vineyard Global Advisors, data sourced through Bloomberg

Below is the seasonal chart of the S&P 500 since 1928. The blue line is its seasonal pattern, and the red dashed line is how the S&P 500 has traded this year. It’s not unusual to see some weakness in August and September.

The bulk of the seasonal weakness is typically over by the end of September. If it continues to follow the seasonal script, we should see an end to the seasonal weakness over the next week or so. Other cycles we track suggest it could be as soon as early next week.


*Source: Ned Davis Research

Net-net: We view this August-September weakness as a corrective pullback, not the start of a new bear market decline of 20%+. We raised some cash in our strategies in anticipation of this seasonal weakness and have been slowly putting it back to work in anticipation of a year-end rally as long as our indicators and macro models continue to show limited deterioration.

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