U.S. Stocks Decline in Parallel with Bond Market Drop

SadaNews - "Wall Street" began September with a decline, as stocks joined the drop in bonds amid heavy sales of corporate debt and concerns about the budgets of developed countries. The dollar rose, and gold reached a record level.

Yields on 30-year U.S. Treasury bonds approached 5%, putting pressure on technology stocks, which had seen their valuations expand as they rose from their lows in April. Meanwhile, the "S&P 500" trimmed its losses, with nearly 400 of its stocks experiencing a decline. All major companies fell, with "NVIDIA" experiencing its longest drop since March.

Alongside a series of corporate sales, renewed concerns arose regarding long-term global debt after years of issuance leading to a worsening budget deficit. In the UK, the yield on long-term bonds reached its highest level since 1998, and the pound sterling weakened, increasing pressure on Prime Minister Keir Starmer to manage the budget.

September is a Volatile Month

Thomas Tsitsouris from "Strategas" stated, "Wake me when September ends!" He added, "We suspected that September would be a volatile month, and the first day has proven to be just as volatile as advertised."

U.S. President Donald Trump announced that his administration will request the Supreme Court to issue an urgent ruling, hoping to overturn a federal court ruling that many of his tariffs were imposed illegally. He added, "The stock market fell because it needs tariffs; it wants them."

Scott Ren from the "Wells Fargo Investment Institute" stated that "the decline in tariff income means more sales of U.S. debt to cover spending deficits."

As traders return to their offices from summer vacations, they will face key U.S. economic data, concerns over U.S. tariffs, Federal Reserve independence, global financial forecasts, as well as questions about the pace of interest rate cuts.

These events come at a time when the stock market seems to be at a crossroads after the "S&P 500" recorded its lowest monthly gains since July 2024, just before the start of what is historically known as the weakest month for stocks.

Strategists at "Bespoke Investment Group" remarked: "As if we all haven’t felt enough disappointment over the end of summer, the markets slapped us today to bring investors back to reality."

Of course, there are substantial reasons supporting the rise of the "S&P 500" from its lows in April. The economy has remained relatively resilient in the face of Trump’s tariffs while the engine of U.S. corporate profits continues to roar.

Investors Concerned About a Bubble

However, with so much uncertainty, investor anxiety has increased that the market is overvalued. The benchmark U.S. index is trading at 22 times the average earnings of analysts projected for the next 12 months. Since 1990, the market price has only risen at the peak of the dot-com bubble and the tech euphoria that resulted from the COVID pandemic in 2020.

Anthony Saglimbene from "Ameriprise" stated: "Except for the September surprise, investors face ongoing threats from trade ambiguity and tariffs, along with economic data that may show weaker than expected trends, which could ultimately challenge high stock valuations." He added, "Nonetheless, investors have been facing these dynamics for months, and stocks have continued to rise."

In his view, investors should maintain a diversified investment portfolio and remain cautiously optimistic about the investment landscape, based on a solid foundation of growth, while considering the possible volatility of September, should it occur.

"Recessions in markets always feel bad, and there are always reasons to say this time is different, but looking at the current situation and from a long-term perspective, recessions are often shallow and quick," according to Chris Vecchio of the "Commonwealth Financial Network." He added, "Stay alert to headlines that may affect the economy, but pay attention to the fundamentals. They always drive long-term performance."

Expectations for U.S. Rate Cuts

The "S&P 500" closed in August near its all-time high, defying a narrative that might have looked less positive just weeks ago, according to the global market strategy office at "Invesco". What drove this resilience? U.S. economic growth remained strong, and many increased expectations that the Federal Reserve would cut interest rates at its upcoming meeting.

Invesco added: "As we approach September and October, we are likely to hear echoes of the same concerns, including seasonal factors, policy risks, and valuations," adding that they do not see significant evidence of an end to this cycle. Macroeconomic data and market signals continue to indicate otherwise."

Despite the likelihood of volatility and short-term declines in September, the chief investment office at "UBS" believes that investors who do not allocate sufficient investments to stocks should consider gradually investing and taking advantage of market dips to increase their investments.

The firm expects the "S&P 500" to reach 6800 points by the end of June 2026, supported by profit momentum, interest rate cuts by the Federal Reserve, the ongoing long-term trend of artificial intelligence, positive returns following September, and record highs.

Ulrike Hoffmann-Burchardi from the Global Wealth Management at "UBS" stated: "We recommend investors who are not investing enough in stocks to consider gradually expanding and take advantage of market dips to increase their investments in preferred sectors." She added: "Along with artificial intelligence, energy and resources, and longevity, we prefer the technology, healthcare, utilities, and financial services sectors in the United States."

U.S. stocks will continue to rise after four months of gains, as interest rate cuts by the Federal Reserve coincided with robust corporate earnings, according to Michael Wilson of "Morgan Stanley."

Wilson wrote in a note: "We reject the idea that interest rate cuts are already priced in. We respect the upcoming weak seasonal period, but we continue to buy dips if they occur."

A Critical Week for Economic Data

This week’s focus is on key labor market data for indicators on economic growth and Federal Reserve policy expectations. U.S. employers did not show much enthusiasm for hiring workers during August, and the unemployment rate likely rose to its highest level in nearly four years, further reinforcing signs of a weak labor market.

Ian Lyngen and Phil Hartman from "BMO Capital Markets" stated: "The significance of economic data this week will ultimately determine the direction of yields at Friday's close, even if many factors may change investors' outlook on the state of the labor market in the meantime."

BMO strategists said: "Although Tuesday was technically a holiday, the Treasury bond market saw trading more like a late summer Monday." They added: "The downward tone in U.S. interest rates indicates that it is primarily a concern about supply rather than macroeconomic fundamentals."

They also pointed out that the pairing of a shortened week due to holidays and the significance of Friday’s jobs data complicates the timing of new deal rollouts in the market, although as the number of deals quickly increases, it is difficult to ignore the upward pressure on yields linked to selling fixed-rate interest.]

Manufacturing Activity Contraction

U.S. manufacturing activity contracted in August for the sixth consecutive month, driven by a downturn in production that indicates the manufacturing sector is still suffering from increased import tariffs.

Scott Helfstein of "Global X" stated: "The Institute for Supply Management's manufacturing orders report indicated that companies are largely managing staff numbers rather than actively hiring." He added, "This may be an indicator before the jobs figures are released on Friday. New jobs are likely to slow, but substantial adjustments to the previous months' data may mean that the report, whether positive or negative, may not affect investors much."

Helfstein indicates that investors should pay close attention to wage growth in the job report due on Friday.

He noted that "wages have outpaced inflation, which is usually a good indicator for consumption. While delinquency rates are rising slightly, most consumer behavior indicators have remained strong."

Swap markets currently price in more than 20 basis points of Federal Reserve interest rate easing in September, pricing in slightly over a quarter percentage point by the end of 2025.