Will this be a September to remember?

Over the past 95 years, September has been the worst month of the year when it comes to seasonality, and the only month with average negative returns above 1% (-1.17% to be exact). This year, its seasonality record overlaps with another event that is pretty strong and this is the presidential election year cycle.

Graphics are for illustration and discussion purposes only. Please read the important disclosures at the end of this comment.

During presidential election years, the stock market tends to do very well. The theory is that the party in power is trying to make sure the economy does well so that the incumbent gets re-elected – or their party’s candidate wins.

The stock market has done well this year, with some jitters in April and quite a bit more in late July and early August. But like As we enter the final two months before the presidential election, the broad stock market, as measured by the equal-weight S&P 500 index, is at an all-time high.

Graphics are for illustration and discussion purposes only. Please read the important disclosures at the end of this comment.

We have the convergence two the September cycles, namely the long-term expected average stock return and the presidential cycle return, which suggest a choppy market in the two months leading up to the election (shaded area, top right).

No one can guarantee that September will be down, other than to say that history is only a suggestion. We also have an interest rate cut by the Federal Reserve on September 18th^thwhich will most likely be 25 basis points, unless we get a bad jobs report and increase weekly jobless claims before the FOMC meeting, at which point we will most likely get 50 bps.

I think the Federal Reserve is slow to cut interest rates, but Jerome Powell will be forgiven a lot if he avoids a recession, which at this stage is still unknown. Right now it looks like a soft landing for the US economy, but as far as I’m concerned, the difference between a soft landing and a soft recession is getting pretty blurry.

Bank of Japan may shake up markets again

While the Nikkei 225 index loves a weaker yen due to the nature of the index, full of large Japanese exporters, it has not been a straightforward relationship over time.

Recently, the sudden strengthening of the yen has pressured the index extremely, but we have had periods of time when a stronger yen meant a stronger Nikkei and vice versa, when the movements of the yen were less extreme.

Graphics are for illustration and discussion purposes only. Please read the important disclosures at the end of this comment.

The Nikkei has recovered three-quarters of its losses this summer, while the yen hasn’t weakened as much. The BOJ may not raise rates in September, as was their original plan.

Then again, the Nikkei’s big rally could convince them to raise rates anyway, which could trigger another round of volatility if the yen makes further gains past its strongest summer high.

The problem with Japan is that it had a negative policy rate for a long time when bond yields were very low. No one can be sure how the Japanese financial system will cope with slightly rising interest rates and the losses they will cause in the system.

Graphics are for illustration and discussion purposes only. Please read the important disclosures at the end of this comment.

In the US, we have a rough idea of ​​unrealized losses on held-to-maturity portfolios in the banking system, which is north of $600 billion (see chart above).

As US interest rates fall, these losses become somewhat smaller, but are still considerable. Interest rates haven’t risen that much in Japan yet, and the BOJ promises to go very slowly, precisely because they don’t know the size of the problem, which could eventually turn out to be similar to what we have in the US then when interest rates rise more appreciably.

If the BOJ hikes in September, I expect more fireworks, similar to what we saw over the summer, though hopefully not as big. It all depends on how violently the yen moves. If the Fed cuts rates because the BOJ can raise rates, it’s not out of the question for the yen to hit a new high for the year. I certainly hope that the infamous yen swap will largely go ahead if this happens.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Disclaimer: Click here for important disclosures found in the “About” section of the Navellier & Associates profile accompanying this article.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Original post

Editor’s note: The abstracts for this article were chosen by the editors of Seeking Alpha.