The "September Curse" comes true! Overnight, the US stock market plummeted, what happened?

Nvidia plunges, major stock indices all decline, and the "fear index" surges... The "September curse" is playing out in the US stock market.

For decades, there has been a saying in the US stock market about the "September effect". Within the past century, September is the only month with a negative average return in the US stock market, and even some black swan events tend to occur in September, such as the 1931 American dust bowl and the Great Depression, the famous "9/11" terrorist attacks in 2001, and the bankruptcy of Lehman Brothers in September 2008...

This year, the "September curse" has also come true! On Tuesday, traders returned from the "Labor Day" holiday only to face a "brutal start", not only did the large-cap stocks led by the Mag 7 drag down the S&P 500 and Nasdaq, but small-cap stocks also failed to rotate to support the market, and the value representative Dow Jones also fell from its high position.

And this sell-off is not limited to stocks, commodities across the board have been wiped out, even gold, which has been hitting new highs this year, was not spared from selling, and oil prices erased their gains for the year. Only US bonds played a safe-haven role in the sell-off, and defensive sectors such as essential consumer goods, utilities, and healthcare relatively resisted the decline.

The catalyst for the sell-off was the US two PMI data released overnight, with the sub-indices showing a decline in orders and an increase in inventories, considered one of the most worrying signals since the global financial crisis, while the price index picking up momentum indicates a rebound in CPI, conveying concerns about stagflation...

The "September curse" sweeps through the US stock market

On September 3, major US indices all saw their largest single-day declines since August 5, with the S&P 500 falling by 2.4%, the Nasdaq dropping by over 3%, marking the third largest single-day drop in the past year, and the Dow Jones, closely related to the economic cycle, falling back below 41,000 points.

The leading stocks in the US market, the Mag 7, collectively fell, with Nvidia falling by 9.53%, hitting a more than three-week low, evaporating $279 billion in market value, marking the largest single-day market value loss in the history of US stocks for an individual stock, dragging down the semiconductor sector to its largest drop since March 2020.

Although tech stocks suffered heavy losses, there was no rotation in the US stock market overnight, with small-cap representative Russell 2000 plummeting by 3%, also the largest drop since August 5.

The "fear index" VIX surged by 40%, rising from 15 to an intraday high of 21.99.

The debacle is not limited to stocks, as commodities have also been hit hard, with Brent crude oil falling nearly 5% to below $74 per barrel, wiping out all gains for 2024.

Spot gold briefly fell 1% below the $2500 mark, with the only true safe haven being U.S. Treasuries. Treasury yields across the board declined, with the 2-year Treasury yield hitting an intraday low down 7 basis points, and the 10-year Treasury yield dropping nearly 10 basis points.

The Culprit of the Plunge: PMI Data Pointing to Recession and Stagflation

The release of two PMI data sets overnight ignited market concerns about the U.S. economy.

In the ISM Manufacturing PMI, the new orders index was at 44.6, the worst since June 2023, down from the previous value of 47.4 in July; the inventory index was at 50.3, a significant increase of 5.8 points from the previous month's 44.5; and the manufacturers' price index rose from 52.9 in July to 54.

The Markit Manufacturing PMI and ISM sub-index data are converging, conveying three major signals:

First, the employment index has significantly rebounded from July, indicating that Friday's non-farm payroll report will be stronger than expected;

Second, the manufacturers' price index is on the rise again, indicating that the cooling of commodity inflation may have ended, and even the low point of the current CPI may have been seen;

Third, the new orders/inventory ratio has fallen to recession levels, indicating serious issues in the manufacturing sector.

The commentary in the Markit report even suggests that the U.S. economy is not just facing a recession, but rather a manufacturing slump:

The further decline in the PMI indicates that the drag on the economy from manufacturing has increased in the mid-third quarter. Leading indicators suggest that this drag may intensify in the coming months.

Sales below expectations have led to warehouses filled with unsold inventory, and the lack of new orders has prompted factories to cut production for the first time since January. Concerns about overcapacity have led manufacturers to reduce headcounts for the first time this year and cut back on purchases of inputs.

The combination of declining orders and rising inventories signals the most pessimistic production trend in a year and a half, and is one of the most worrying signals since the global financial crisis.

While the drop in demand for raw materials has eased pressure on supply chains, reports of rising wages and high freight costs are widely cited as factors pushing up input costs, which are currently rising at the fastest pace since April last year