Key points:
The Federal Reserve’s decision to cut rates by 50 basis points sent the benchmark S&P 500 to its first closing all-time high in two months. So far, the index has gained 0.8% in September, a month historically known for weaker performance in equities.
With a 19% increase year-to-date, the S&P 500 has delivered strong returns, but traders should remain cautious as the rocky period could last until the Nov 5 U.S. presidential election.
Volatility tends to rise in election years, and this year is no exception. The Market Volatility Index (VIX) typically climbs to 25 at the start of October during election periods, while the long-term average sits at 19.2.
Currently, the VIX stands at 16.4, but traders should prepare for potential fluctuations as the U.S. election draws closer. With polls showing a tight race between Republican Donald Trump and Democrat Kamala Harris, market participants are already feeling the pressure.
Upcoming economic reports on manufacturing, consumer confidence, and durable goods will set the tone for market sentiment. Additionally, the personal consumption expenditures (PCE) price index, a key inflation gauge, will be closely watched as traders seek confirmation of a “soft landing.”
A soft landing, where inflation slows without severely impacting economic growth, could keep markets on a steady path. Historically, stocks perform better when the Fed cuts rates in a stable economy rather than in a recessionary environment.
The spotlight will shift to employment data as traders assess the strength of the labour market. The U.S. jobs report, due on Oct 4, will be crucial, especially after Federal Reserve Chair Jerome Powell’s comments emphasising the need to prevent a weakening job market.
You might be interested: FOMC: Here’s why we’d love to see the Fed cut by 50 basis points in September
The rally in equities has raised concerns about valuations. The S&P 500’s price-to-earnings ratio now stands at 21.4 times expected 12-month earnings, far above its long-term average of 15.7.
This elevated valuation suggests that further market gains will rely heavily on strong corporate earnings in the upcoming reporting season. Analysts expect third-quarter earnings to rise by 5.4% from the previous year, with a nearly 13% jump forecasted for the fourth quarter.
Picture: S&P 500 surged, trading at 5726.93 as seen on the VT Markets app.
With macroeconomic data and political uncertainty weighing heavily on the market, traders should stay focused on fundamentals and prepare for elevated volatility in the weeks ahead.
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