Is September always the time when US stocks and the US dollar "part ways"?

The return of the US stock market in September has been poor. Over the past century, September is not only the worst month in terms of average return for US stocks, but also the only month with a negative average return, reaching -0.78%. Expanding the perspective: among 70 countries globally, September is also the month with the worst median and average stock market performance.

In terms of the relationship between the stock market and the foreign exchange market, looking at the seasonal performance of the US Dollar Index over the past 5 years, September seems to be a relatively good performing month, while the fourth quarter is often the worst phase for the US Dollar Index. Projecting to this year, if the Federal Reserve significantly cuts interest rates, it seems that the US Dollar Index will come under further pressure, indicating that there may be a "divergence" between US stocks and the US dollar exchange rate in September.

Of course, due to the special circumstances of this year - the Federal Reserve may initiate the first rate cut in over 2 years - the above analysis seems reasonable, suggesting that the US dollar and US stocks may diverge again after September. However, it should be noted that in the past few years, the United States has been in a rate hike cycle, so there may still be some doubts about whether the seasonality shown in the past few years is applicable in a rate cut cycle.

The US Dollar Index has struggled in what should have been a strong September, indicating a strong market expectation for rate cuts. Once the US dollar continues to weaken, such counter-seasonal behavior will challenge the more important traditional rule - that the US Dollar Index often performs poorly in the fourth quarter.

And if the US dollar does continue to weaken, it means that the US economy is likely facing problems or even entering a recession, which may also challenge the tendency for US stocks to perform strongly in the fourth quarter.

In other words, this September, the market needs to focus more on studying the fundamentals of the US economy. From an economic research perspective, a cooling labor market is a warning early signal to be vigilant about, but if more economic data (such as consumption) confirms this, the prospect of a weakening US economy will become a definite macro background.

The return of the US stock market in September has been poor. Over the past century, September is not only the worst month in terms of average return for US stocks, but also the only month with a negative average return, reaching -0.78%. Expanding the perspective: among 70 countries globally, September is also the month with the worst median and average stock market performance, without exception.

This seasonal performance of US stocks is actually a result of reflexivity (the more people believe it, the more people do it, and then it becomes a positive cycle), other examples include "Sell in May and Go Away," "Santa Clause Rally," and "January Effect" (referring to the significant impact of January stock market performance on the direction of the stock market for the year).

There was originally no road in the world, but as more people walked, it became a road. Of course, there are other explanations for seasonality, but we believe that the explanation of reflexivity is more reasonable. This is similar to why technical analysis works - when there are more people drawing support lines at a certain level, support is created If we extrapolate the seasonality of the US stock market, we will find some interesting phenomena.

For example, looking at the performance of the S&P 500 Index in the past five years, although September has not performed well, the fourth quarter often sees a significant rebound. Applying this to the current year, despite the deepening concerns about a US economic recession, if the Federal Reserve continues to cut interest rates, or even cuts rates significantly, it seems to provide support for the stock market.

Of course, the focus of our discussion today is the relationship between the stock market and the foreign exchange market. Looking at the seasonal performance of the US Dollar Index over the past 5 years, September seems to be a relatively strong month, while the fourth quarter is often the worst period for the US Dollar Index.

In the context of this year, if the Federal Reserve significantly cuts interest rates, it appears that the US Dollar Index will come under further pressure, indicating a potential divergence between US stocks and the US dollar exchange rate in September.

However, due to the special circumstances of this year - the Federal Reserve may initiate its first rate cut in over 2 years - the analysis above seems reasonable, suggesting that the US dollar and US stocks may diverge again after September. It should be noted that the US has been in a rate hike cycle in recent years, so there are still doubts about whether the seasonality observed in the past few years applies in a rate cut cycle.

Many investors may point out that it would be more reasonable to reconsider a similar rate cut cycle, which sounds logical. However, two issues are often overlooked. First, the current US economic cycle is in a process of "de-globalization", which may differ from the "globalization" trend of the past thirty years;

Second, the market itself has inertia, which can explain why significant seasonality has occurred in the past 5 years. In other words, even if the market background is completely different, market trends may unconsciously repeat. It's like the four seasons of the year, every time you go downstairs to buy lunch at noon, you often think that you are tired of beef rice and want to change the taste, but in the end, you still choose beef rice.

At this point, it seems that we have not solved any market issues. Yes and no. For example, the US Dollar Index struggled in what should have been a strong September, indicating strong market expectations for rate cuts. So far, the US Dollar Index has fallen by 0.64% in September, the worst performance since 2019 (of course, it's only been a week in September). From this perspective, the US dollar still has the opportunity to rebound in the coming weeks.

If the US dollar continues to weaken, this counter-seasonality will challenge the more important traditional rule in the future - that the US Dollar Index often performs poorly in the fourth quarter. And if the US dollar does continue to weaken, it implies that the US economy is likely facing problems or even entering a recession, which may also challenge the tendency for US stocks to perform strongly in the fourth quarter In other words, this September, the market needs more research on the fundamentals of the U.S. economy.

Many questions may not seem easy to answer, but lower interest rates (stronger recession expectations) also mean that the government can issue more debt, which may provide stronger support for the economy. At the same time, we can further confirm whether labor market indicators or other indicators are more "a priori" in the process of economic cooling. So far, the cooling of the labor market may be an early and clear signal, and the importance of this indicator is self-evident historically.

However, just like the "seasonality" we discussed in today's report, most things will not simply repeat. Therefore, from the perspective of economic research, the cooling of the labor market is an early warning signal worth noting. If more economic data (such as consumption) is used to confirm, then the weakening prospects of the U.S. economy will become a definite macro background.

Author: Zhou Hao (S0880123060019), Sun Yingchao, Source: Guojun Overseas Macro Research, Original Title: "[Guojun International Macro] Always in September: U.S. Stocks and the U.S. Dollar 'Part Ways'?"