Avoiding the "September curse," the focus of the US stock market in October is on economic risks

Although historically, the U.S. stock market tends to perform poorly in September, investors expect the market to continue to rise in October in the face of the presidential election, Federal Reserve policy, and concerns about economic recession. Expansion of the U.S. stock market rise, no longer dominated solely by tech giants In the first week of September, the U.S. stock market experienced a "black opening", with technology stocks, artificial intelligence stocks, and chip stocks suffering heavy losses. The S&P index fell more than 4% for the week, marking the largest weekly decline in a year and a half. The Nasdaq 100 fell nearly 6% for the week, marking the worst weekly performance since 2022 in nearly two years. The chip stock index fell 12% for the week, the worst in four years, with NVIDIA falling 14% for the week, the worst performance in two years. However, following a series of economic data showing a cooling of U.S. inflation, resilience in the economy, and optimistic expectations of a soft landing achieved by the Fed rate cut, the three major U.S. indices saw three consecutive weeks of gains, with September likely to close higher. The Dow and S&P 500 repeatedly hit new highs, and the S&P 500 index is expected to rise by 5.1% in the third quarter, the best performance in the first nine months of the year since 1997, all of which occurred in historically weak September. It is worth noting that these gains did not rely on tech giants that have historically driven market growth. In fact, the Nasdaq 100 index only rose by 1.7%, while equal-weighted indices such as the S&P 500 rose by nearly 9%, indicating that the recent gains were driven by broad-based optimism about the Fed rate cut and economic soft landing. According to data compiled by Bloomberg, the performance of equal-weighted indices such as the S&P 500 in the third quarter is expected to outperform conventional market cap-weighted indices, with the margin of outperformance being the largest since the last three months of 2022. This indicates that not only large companies, but many medium-sized companies are also driving market growth, showing a more widespread upward trend in the market. Note that the equal-weighted indices such as the S&P 500 include all companies in the S&P 500 index, but the weight of each company in the index is the same, regardless of the size of the company's market value. This is different from the conventional market cap-weighted version of the S&P 500 index, where larger companies have a greater impact on the index. Furthermore, this rebound did not receive much support from NVIDIA, the company that represents the artificial intelligence boom and has been driving the stock market bull run for nearly two years, but stagnated this summer. Some investors are full of confidence, betting on the continued rise of the U.S. stock market Investors are optimistic about whether the upward trend in the stock market can continue into October and the end of the year. Mary Ann Bartels, Chief Investment Strategist at Sanctuary Wealth, expects the S&P 500 index to reach 6,000 points by the end of 2024, about 4.6% higher than last Friday's closing price. She believes that although the momentum of chip stocks has paused, large-cap tech stocks and chip stocks will lead the market to continue rising in the fourth quarter. Her view is supported by hedge fund trading data. According to a major brokerage report from Goldman Sachs, the volume of trades betting on the rise of information technology stocks is nearly three times that of trades betting on a decline The options market positioning shows a similar optimistic sentiment. The five-day moving average ratio of put options to call options is close to 0.51, the lowest level since July 2023, indicating that market participants' bearish sentiment towards the future stock market is weakening. Economic recession risks remain, caution is still needed Despite the optimistic market sentiment, there are still some risks. For example, the Federal Reserve is trying to achieve an economic soft landing after rapid inflation and aggressive rate hikes, but this effort has had little success. In addition, data from the New York Fed shows that the likelihood of an economic recession occurring in the next 12 months remains high. Bartels pointed out, "Friday's employment report is crucial as it will provide us with more clues about the economy and how much the Fed will cut rates at the next meeting." Nevertheless, the market generally expects economic growth to remain stable. The Atlanta Fed's GDPNow model predicts that the annual growth rate of real Gross Domestic Product (GDP) for the third quarter will increase from 3% in the second quarter to 3.1%. Furthermore, considering that the S&P 500 Index is currently at historical highs and lacks strong catalysts such as key economic data or earnings releases, short-term options pricing for the coming weeks seems to be too high. Over the next six weeks, investors will need to navigate two key employment reports, earnings reports from major U.S. companies in October, the U.S. presidential election on November 5th, and the Fed's next interest rate decision on November 7th. There is a divergence among traders on the magnitude of the next rate cut, with the swap market indicating an increasing likelihood of a 50 basis point cut. Regardless of the approach taken, there are risks involved. Tony Roth, Chief Investment Officer at Wilmington Trust, said, "If the Fed continues to cut rates at a pace of 25 basis points each time, considering the current economic trends, we believe this may increase the risk of an economic recession next year. Nevertheless, I still predict that the S&P 500 Index will reach 6000 points by the end of the year. With expectations of an economic soft landing strengthening in the market, the stock market seems to have no choice but to continue to rise." Analysts remain bullish on chip stocks Despite potential short-term uncertainties in the market, investors remain optimistic about the rebound of tech stocks in the long term, expecting this to drive market momentum. Rich Ross, Head of Technical Analysis at Evercore ISI, is optimistic about semiconductor stocks in the fourth quarter, especially after the largest U.S. computer memory chip manufacturer Micron Technology released a surprisingly strong sales forecast. He expects that the VanEck Semiconductor ETF, which includes industry leaders such as NVIDIA, Micron, and Broadcom with a market cap of $253 billion, will rise another 20% by the end of the year after a 45% increase in the first three quarters. However, Dan Suzuki, Deputy Chief Investment Officer at Richard Bernstein Advisors, stated, "The rebound of tech stocks should drive market momentum, but if this rebound comes at the expense of market breadth, I would not consider it a healthy market signal ”