September has historically been a weaker month for stocks. While economic data continues to show soft momentum, positives earnings reporting and the prospect of future monetary easing in the U.S. have shored up confidence and lifted many major global equity markets. At the same time, renewed questions about the sustainability of public finances across several major economies have been exerting upward pressure on long-term bond yields. We discuss these issues more below.

September seasonality

Since 1928, September has been the S&P 500’s weakest month, with an average monthly decline of 1.2%, underperforming all other months. September returns were also negative 55% of the time over this period. Similar seasonal patterns are also seen in the U.K. and Canadian markets. Given this historical seasonality and with earnings catalysts largely behind us, market participants are likely to turn their attention towards economic data, monetary policy signals, and policy developments out of the White House. Beyond short-term seasonality, however, corporate earnings fundamentals continue to look solid and remain the long-term foundation for equity markets.

Watching the U.S. data

Signs of continued softening in the U.S. labour market have increased expectations for a Federal Reserve rate cut this month. July’s underwhelming jobs report was accompanied by large downward revisions to the prior two months’ figures. At the same time, inflation remains above the Fed’s 2% target, with some indicators suggesting that price pressures could flare up again. Fed policymakers will need to navigate a delicate balancing act between supporting growth and maintaining price stability. Growing optimism for monetary easing has helped bolster equity markets since the Fed’s Jackson Hole symposium in late August, making upcoming jobs and inflation data crucial in shaping the outlook for interest rates.

Bond markets

While short-term Treasury yields in the U.S. have fallen on rate cut expectations, long-term yields have risen, resulting in a “steepening” of the yield curve. Several factors have contributed to this dynamic, including concerns around the U.S. budget deficit and the Trump administration’s rhetoric challenging central bank independence.

Higher long-term bond yields have been a global phenomenon, with 30-year government bond yields in several major developed nations (U.K., Germany, France, Japan) recently reaching their highest levels in over a decade. A common thread behind the upward pressure on long-term yields is elevated government budget deficits, as many governments face increasingly complex fiscal tradeoffs. Governments are balancing the need for increased spending on defense, infrastructure renewal and development of strategically important industries against the need for fiscal restraint to maintain the credibility of public finances and investor confidence.

Takeaway

Resilient corporate earnings and optimism over potential U.S. Federal Reserve rate cuts have helped support global equity markets, allowing them to extend gains despite a tepid economic growth environment. We believe that “invested, but watchful” remains a sensible posture for portfolios as we continue to monitor economic data, earnings trends and global bond yields.

If you have any questions, please do not hesitate to contact us.

 

Drew M. Pallett LL.B.

Senior Portfolio Manager and Investment Advisor 

RBC Dominion Securities     

Email: drew.pallett@rbc.com