Scary September for Stocks, More Volatility Expected for VTI (NYSEARCA:VTI)

Stocks tumbled in a spate of September scares. This is normal price action if you have been monitoring seasonal trends over the past few years. In fact, it was quite remarkable how well historical seasonal trends performed played lately.

VTI: Worst week since March 2023

Shares ETF Vanguard Total Stock Market Index Fund (NYSEARCA:VTI) has fallen in each of the last four Septembers. For whatever reason, bears often assert themselves as the third quarter draws to a close.

This negative price action has come just as the Fed is embarking on what is likely to be a prolonged rate-cutting cycle and the US general election is just eight weeks away.

Four to five quarter point price cuts by the end of the year

Volatility often rises before voters head to the polls

I reiterate a hold rating on VTI. I became cautious about the domestic stock fund in mid-July, and the stock peaked shortly after on July 16. For almost two months now, it has been a sideways downtrend marked by a potential double bear pattern. on the chart.

Shares initially fell following a peak in Magnificent Seven tech stocks and the subsequent crash in Tokyo on August 5. Healthy macro data and a dovish Fed helped VTI bounce back strongly towards the end of last month, before bearish sentiment resurfaced last week.

Mag 7 Stocks in Correction Mode: GOOGL, NVDA Hit Bear-Market Territory

Weak labor market data, including a soft overall payrolls report in August, was the latest culprit for some Wall Street selling. It wasn’t so much the headline print that worried investors, but negative revisions over the past two months and a peak cycle of the “underemployment” rate cast doubt on the health of the labor market. Moreover, data ahead of Friday’s NFP report suggested a deterioration in the jobs situation.

Goldman: The US economy needs 150,000 jobs a month

The Sahm Rule indicator jumps further after the August NFP report

July’s JOLTS figure was much lower than expected, while the ADP Private Payrolls number came in below estimates. In addition, the ISM sub-indices of employment in manufacturing and services were not as robust. Furthermore, initial weekly jobless claims don’t scream recession, and even continuous claims are only flat since June.

The upward trend in jobless claims stands near 230k/week

All the while, consumers continue to spend, highlighted by a strong July retail sales report and card spending data that point to solid spending, at least in the upper half of the income cohort. Earnings reports from Five Below ( FIVE ), Dollar General ( DG ) and Dollar Tree ( DLTR ) underscore the struggles among lower-income households, however.

Looking ahead, it’s all about inflation this week with NY Fed inflation expectations on Monday morning, CPI on Wednesday, PPI on Thursday and University of Michigan Consumer Surveys on Friday. If we do indeed see further cooling in US inflation, then it will give Chairman Powell and the rest of the Federal Open Market Committee (FOMC) the Fed ammunition to start their campaign to cut rates with a whopping 50 basis points ease .

Also note that we will get August retail sales before the FOMC decision next Wednesday, September 18th.

Data on tap: Inflation in focus this week

After a 5% retreat from its third-start all-time high, the S&P 500’s forward price-to-earnings ratio fell to just 20.2. We estimate that 20x earnings is a fair level for domestic large caps, given the high EPS growth forecast next year and the generally healthy balance sheets among the world’s largest firms today.

S&P 500 Instant Earnings: $268 NTM, $280 Expected in 2025

It is also important to recognize that interest rates are significantly lower today than they were a year ago. We remind you that the yield on the benchmark 10-year bond reached 5% in October 2023.

Today, the rate is 3.71% ahead of key inflation data and the Fed’s two-day meeting. This means that the equity risk premium is slightly better compared to just a few months ago when the price/market bunt was higher and the real 10-year TIPS yield was closer to 2%.

Interest rates fall, 10-year levels to May 2023

Technical takeover

So while I see valuations as reasonable, seasonality and technicals remain a concern in my view. The VTI, like the S&P 500, exhibits a double-top pattern on its chart. The good news is that its 200-day long-term moving average remains in the positive slope, suggesting that the bulls are in control of the primary trend.

What I don’t like about the chart now is that the RSI momentum oscillator made a much lower high during the August pullback. It is crucial that the higher low at $251 holds. A drop below this would also mean a drop below the 200 dma. $244 is the next level of support for VTI – the late 2021 and early 2022 highs, as well as where the fund pulled back in April.

VTI: Bearish Double Top In Play, $251 and $244 Support

conclusion

I have a hold rating on VTI. Volatility often spikes in election years leading up to late October, so some additional sideways action from slightly lower prices would make perfect sense in the short term. Longer-term, VTI’s valuation is reasonable, given EPS growth estimates that span multiple quarters and given that real interest rates are about 70 basis points from cycle highs.

This week’s inflation data will be key, as will the mid-month retail sales report ahead of the Fed’s September 18 interest rate decision.